(Bloomberg) -- Traders are paring back their expectations for South African interest rate hikes after the latest reading on inflation matched economist expectations.
July’s CPI figure was the first in three months not to surprise the market to the upside. That’s eased some concern that the central bank will have to continue with aggressive policy moves.
Forward-rate agreements for the year 2023 and 2024 -- used to speculate on South African monetary policy -- fell Wednesday after data showed the headline consumer-price index rose 7.8% from a year earlier, compared with 7.4% in June. The spread between the contracts has now narrowed to less than 20 basis points from wider than 100 basis points two months ago, suggesting rate stabilization is on the horizon.
Last month, policy makers delivered the biggest increase in borrowing costs in almost two decades and signaled a faster pace of hikes through next year. Central bank Governor Lesetja Kganyago has since told lawmakers that headline inflation may be nearing a peak. Rand Merchant Bank analysts noted earlier this month that falling oil prices have eased pressure on the South African Reserve Bank.
The inflation data has allowed “rate hike expectations to get priced out of the curve,” Michelle Wohlberg, a Johannesburg-based fixed income analyst at RMB, said in a note to clients on Wednesday.
There are some risks to the view of a moderating rate path.
The US Federal Reserve has pushed back on calls for it to be less aggressive in monetary policy tightening in the face of recession. This may force emerging nations to continue with a hawkish stance for longer than anticipated.
South African Inflation Quickens at Fastest Pace Since 2009
In addition, the South African central bank only sees headline and core inflation returning close to the 4.5% midpoint of its target range -- the level at which it prefers to anchor price-growth expectations -- in the fourth quarter of 2024.
©2022 Bloomberg L.P.
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