Traders add to SA rate-cut bets after inflation cools - but some economists unconvinced
Traders raised bets that South Africa's central bank will resume its rate-cutting cycle next month after inflation slowed to its lowest level in almost five-years in March, taking it below the floor of the central bank's target range.
Forward-rate agreements covering the May 27-29 monetary policy committee meeting dropped to price in 17 basis points of easing, or a 68% chance of a 25 basis point cut, up from 52% before the data. Traders are also pricing in a total reduction of 49 basis points by year-end.
The yield on the 2026 government bond, which is most sensitive to policy rates, fell six basis points to 8.14%, on track for the lowest closing level this year.
The annual inflation rate fell to 2.7% last month from a year earlier compared with 3.2% in February, Pretoria-based Statistics South Africa said in a statement on its website on Wednesday. That was less than the 3% median estimate of 15 economists in a Bloomberg survey.
Still, some economists are less convinced that the MPC, which aims to anchor inflation expectations at the midpoint of its 3% to 6% target range, will cut because of the impact US President Donald Trump's trade war may have on inflation and the rand.
The MPC last month paused its key interest rate at 7.5% after three successive 25 basis point cuts.
"We see rates on hold regardless," said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered, noting that it is too soon to read too much into the data after the inflation basket was readjusted in January.
"There is too much unpredictability, a value-added tax increase is on its way, and the same series suggests inflation could rise more strongly in the coming months," Khan said.
Elna Moolman, head of South Africa macroeconomic research at Standard Bank Group, holds a similar view.
While price growth remains benign, it does not "remove all of the reserve bank's potential concerns around medium-term upside pressure on inflation from the global tariff developments and a weaker currency."
Reserve Bank Governor Lesetja Kganyago last week warned that confidence in the global economy has been dimmed by trade tensions and South Africa would not escape from the fallout.
"Risks to domestic inflation and growth have risen markedly since the start of the year," Kganyago said at the release of the central bank's biannual monetary policy review.
He also expressed concern over a 0.5 percentage point increase in VAT that is due to come into effect on May 1. The central bank's research suggests the increase that is expected to be followed by another 0.5 percentage point hike next year, may add 0.2 percentage points to headline inflation annually.
The biggest contributor to cooler inflation was a steep decline in fuel index, which fell to 8.8% from 3.6% decline a year earlier. Food & non-alcoholic beverages inflation also eased to 2.7%, from 2.8%.
Forward-rate agreements covering the May 27-29 monetary policy committee meeting dropped to price in 17 basis points of easing, or a 68% chance of a 25 basis point cut, up from 52% before the data. Traders are also pricing in a total reduction of 49 basis points by year-end.
The yield on the 2026 government bond, which is most sensitive to policy rates, fell six basis points to 8.14%, on track for the lowest closing level this year.
The annual inflation rate fell to 2.7% last month from a year earlier compared with 3.2% in February, Pretoria-based Statistics South Africa said in a statement on its website on Wednesday. That was less than the 3% median estimate of 15 economists in a Bloomberg survey.
Still, some economists are less convinced that the MPC, which aims to anchor inflation expectations at the midpoint of its 3% to 6% target range, will cut because of the impact US President Donald Trump's trade war may have on inflation and the rand.
The MPC last month paused its key interest rate at 7.5% after three successive 25 basis point cuts.
"We see rates on hold regardless," said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered, noting that it is too soon to read too much into the data after the inflation basket was readjusted in January.
"There is too much unpredictability, a value-added tax increase is on its way, and the same series suggests inflation could rise more strongly in the coming months," Khan said.
Elna Moolman, head of South Africa macroeconomic research at Standard Bank Group, holds a similar view.
While price growth remains benign, it does not "remove all of the reserve bank's potential concerns around medium-term upside pressure on inflation from the global tariff developments and a weaker currency."
Reserve Bank Governor Lesetja Kganyago last week warned that confidence in the global economy has been dimmed by trade tensions and South Africa would not escape from the fallout.
"Risks to domestic inflation and growth have risen markedly since the start of the year," Kganyago said at the release of the central bank's biannual monetary policy review.
He also expressed concern over a 0.5 percentage point increase in VAT that is due to come into effect on May 1. The central bank's research suggests the increase that is expected to be followed by another 0.5 percentage point hike next year, may add 0.2 percentage points to headline inflation annually.
The biggest contributor to cooler inflation was a steep decline in fuel index, which fell to 8.8% from 3.6% decline a year earlier. Food & non-alcoholic beverages inflation also eased to 2.7%, from 2.8%.
