Traders are fighting SA’s central bank on policy path

Wall Street’s mantra “Don’t fight the Fed” — or its local equivalent — is falling on deaf ears in South Africa, where traders are rapidly curbing rate-hike bets even as the country’s central bank maintains its hawkish rhetoric.

Forward-rates agreements are now pricing in about 183 basis points of rate increases over the next 12 months, down from as high as 250 basis points less than two weeks ago. That’s after South Africa’s central bank lifted its policy rate by 75 basis points for a second consecutive meeting last month and warned on Tuesday that there’s more to come.

Global markets have rallied this week amid expectations the Federal Reserve and other major central banks will moderate aggressive policy tightening to stave off an economic hard landing. The rand gained 2.6% in the first two days of the week and the FTSE/JSE Africa All Share Index jumped more than 4%.

Still, South African Reserve Bank Governor Lesetja Kganyago said on Tuesday the central bank is not yet ahead of the curve, despite starting its tightening cycle early, and that it may be more aggressive. The central bank has increased its policy rate by 275 basis points since November to 6.25%.

While the pace of tightening reflected upside risks to the inflation outlook, an environment of heightened uncertainty with rising costs and domestic price pressures that have “intensified sharply” mean policy makers may still need to raise interest rates to “levels that are consistent with a stable and lower inflation rate,” the central bank said in its six-monthly Monetary Policy Review.

“Market performance is not the Sarb’s barometer,” economists at Rand Merchant Bank said in a note Wednesday. The MPR highlighted that “tighter policy to control inflation is better than loose policy for the sake of short-term growth. This may be another way of suggesting that rates could stay high for some time still,” the economists said.

© 2022 Bloomberg