Interest rate cut could be looming

Cape Town - South African interest-rate derivatives are starting to predict an SA Reserve Bank (Sarb) interest-rate cut as the slump in oil drives inflation to the lowest in a year.

Forward-rate agreements, used to speculate on borrowing costs, traded below the benchmark three-month Johannesburg Interbank Agreed Rate, signaling investors see more chance of a rate cut than an increase at Sarb’s policy meeting on January 29.

As recently as about a week ago, the contracts were predicting higher rates. Last week India unexpectedly reduced interest rates to help revive growth.

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A slump of almost 60% in crude prices since last year’s peak in June is driving down the cost of fuel in South Africa. That is helping to hold inflation below the upper limit of the Sarb’s 3% to 6% target range at a time when the economy is expanding at the slowest pace since the 2009 recession.

The consumer inflation rate probably dropped to 5.5% in December, a report may show on January 21, according to the median estimate of 12 economists in a Bloomberg survey.

“Our current base case is that rates in South Africa will remain unchanged through year-end 2015,” Bernd Berg, an emerging-markets strategist at Societe Generale SA in London, said via e-mail.

“But looking at the disinflationary and sluggish growth picture, I would not exclude a dovish surprise from the central bank.”

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