SA inflation bets at 2016 high fail to spur rate pricing

The nation’s breakeven rate climbed 7 basis points Tuesday to 6.59 percentage points, the highest since September 2016.
Image: Guillem Sartorio/Bloomberg

Inflation expectations in South Africa surged to a six-year high, but simultaneous worries about growth prevented traders from wagering on a 75-basis point hike at the central bank’s next meeting.

The nation’s breakeven rate — the difference between the nominal yield on five-year sovereign bonds and the inflation-linked yield — climbed 7 basis points Tuesday to 6.59 percentage points, the highest since September 2016.

But forward-rate agreements, used to speculate on policy moves, are only pricing in a 50 basis-point rate hike at the South African Reserve Bank’s July meeting. That’s lower than the highs reached on June 28, when traders saw an 87% chance of a 75 basis-point increase.

While market-driven inflation expectations are rising, there are already signs in the economy consumer-price growth can start to ease, mainly because of risks to economic growth. The country is reeling under load-shedding of the electricity grid, with the state power utility removing 4 000 megawatts of energy.

Meanwhile, oil prices are providing a reprieve as they head for a second month of declines. That may lead to a peak in South Africa’s inflation this month and a drop in transport-related price growth in August, said Reezwana Sumad, a Johannesburg-based research analyst at Nedbank Ltd.

“If the SARB sees evidence of inflation peaking and easing back within the target range within the next four quarters, then this would imply that it doesn’t need to act more aggressively,” said Sumad.

© 2022 Bloomberg

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