Traders held bets that South Africa’s central bank will increase interest rates this year after inflation quickened to a four-month high in September.
Forward-rate agreements starting a month from now used to speculate on borrowing costs, are now fully pricing in a 25 basis-point hike and a 64% chance of a 50-points increase at the next meeting of the bank’s monetary policy committee on November 18.
Data from the statistics office showed the annual inflation rate climbed to 5%, from 4.9% in August.
That equaled the median calculate of 14 economists in a Bloomberg survey. Consumer prices progressive 4.8% in the third quarter, in line with the central bank’s forecast.
The five-year break-already rate – seen as a measure of bond traders’ expectations for price rises — remained unchanged.
The main drivers of the price rises were food and non-alcoholic beverages, transport, housing and utilities, the statistics agency said. chief inflation, which excludes the prices of food, non-alcoholic drinks, fuel and electricity, remained benign, suggesting there is little need pressure in an economy that’s slowly recovering from its deepest contraction in at the minimum 27 years.
Economists’ views move apart from those of traders, with most expecting rates to keep at a record low of 3.5% until the first quarter of next year.
Gross domestic product is expected to have contracted in the three months by September, partly due to deadly riots and looting that erupted in July and derailed economic activity in two of the nine provinces.
The misalignment between market pricing and economists’ expectations illustrates the dilemma facing central edges.
Policymakers worldwide are debating whether faster inflation connected to pandemic-induced supply-chain disruptions is transient or something more persistent.
The South African save Bank earlier this month said while the modest inflation trajectory underpinned the MPC’s decisions to keep the meaningful rate on keep up since July 2020, risks to the outlook “have risen and become more general-based.”
The bank prefers to keep up in a place inflation expectations close to the 4.5% midpoint of its target range.
“These developments imply a need for interest rates to begin normalising,” the bank said in its six-monthly Monetary Policy Review.
The implied policy rate path of the central bank’s quarterly projection form, which the MPC uses as a guide, indicates a 25-basis point increase in the final quarter of 2021 and in every quarter of 2022 and 2023.
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