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Markets see Sarb lifting rates by 50bps

Analysts say the central bank will want to halt weakening of currency to prevent capital outflows.

JOHANNESBURG – South African bonds are still pricing in the first 50 basis point interest rate increase at a single meeting in two years this week, despite comments by the central bank governor suggesting he wants to keep to a path of gradual hikes.

At last week’s World Economic Forum in Davos, Governor Lesetja Kganyago conceded that South Africa’s inflation outlook had deteriorated due to a sharp fall in the rand, but said this was something the bank had expected, playing down the chances of a hike of more than 25 basis points.

At the two policy meetings when the bank lifted rates last year, it adjusted them by 0.25 percentage points each.

But analysts believe the balance of probabilities has shifted enough since the bank’s November meeting to justify an increase of 50 basis points, a view reflected by market indicators.

Nineteen of 31 economists polled by Reuters last week saw a 50 basis point rise to 6.75%, with only 11 predicting a hike of 25 basis points.

Since then forward rate agreements show the money market is pricing in a nearly 70% chance of a 50 basis point rise in benchmark rates.

Kganyago will make the announcement from 1300 GMT on Thursday.

Yields on government-issued debt have drifted back up towards 10% after a brief relief rally pulled them slightly lower last week following a heavy sell-off.

“We believe the SARB (South African Reserve Bank) will wish to halt the weakening of the currency, otherwise capital outflows may increase, raising the probability of a financial crisis in South Africa,” said London-based 4Cast EMEA analyst Rajiev Rajkumar.

The slide in bonds has mirrored a weaker rand, which has tumbled nearly 18% against the dollar in a rout triggered by the shock removal of the finance minister by President Jacob Zuma in early December.

Kganyago said last week the inflation outlook had deteriorated due to the rand depreciation, leaving the bank facing a policy dilemma of rising inflation and slow economic growth.

Investors will also scrutinise the bank’s growth and inflation outlook in Thursday’s statement for pointers on the interest rate trajectory for the rest of the year.

“It’s not just the extent of the hike (this week). Whether you get 25 or 50 basis points hike will inform expectations about how aggressive the hiking cycle is,” said Nedbank Capital head of research Mohammed Nalla.

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