JOHANNESBURG – South Africa’s central bank is most likely to cut interest rates by 25 basis points on Thursday, forward markets showed on Wednesday, as the rand currency continues its rally and political tensions ease.
Forward markets were pricing-in a 56 percent chance of a 25 basis points (bps) cut to benchmark rates, with the probability of a cut by the same margin in March at more than 90 percent.
The one month contracts were calculating a 30 percent chance of a 50 bps cut and about 20 percent probability of a reduction larger than that.
It is a sharp turnaround considering markets were pencilling-in a 25 bps increase ahead of the SARB’s November decision to keep rates unchanged at 6.75 percent.
At that meeting governor Lesetja Kganyago cited the weak rand and its susceptibility to political risks among the reasons the committee had exercised caution and decided against reducing rates again after a cut in July.
Since that meeting, the rand has gained about 16 percent against the dollar to its strongest in nearly three years, with most of those gains made after Cyril Ramaphosa, viewed as business friendly and pro-reform, was elected head of the ruling African National Congress (ANC) in December.
“The entire curve is inverted with markets pricing in dovish bias throughout following the strong rand recovery on the back of the ANC elective conference,” said Halen Bothma of ETM Analytics.
Ramaphosa has vowed to fight corruption and revitalise the economy, and persistent speculation that he may replace President Jacob Zuma as head of state before his term ends in 2019 has been positively received by financial markets.
Economic data has also signalled a stronger-than-expected rebound, with the trade balance recording consecutive surpluses and mining, manufacturing and retail sectors recording strong growth.
“Upside risks which the SARB had been concerned about in November have now receded,” said research analyst at Nedbank Reezwana Sumad.
“Interest rate hikes do not feature for at least the next two years.”
In November the bank said its forecasting model implied three rate increases of 25 basis points each by 2019, but Kganyago stressed this did not mean an unconditional commitment to the model and decisions would be data dependent.
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