Record-low inflation expectations point to rate cut – traders

By Ana Monteiro

(Bloomberg) – Inflation expectations at a record low have convinced traders that South Africa is in line for interest-rate cuts.

The five-year break-even rate – seen as a measure of market expectations for inflation over the period – fell to 4.4% on Thursday, the lowest since at least 2012, when Bloomberg started compiling the data.

And forward-rate agreements, used to speculate on borrowing costs, are pricing in 50 basis points of interest-rate cuts over the next 12 months.

The rand has gained for six straight days against the dollar, its longest winning streak since January, fuelled by a move toward policy easing by the European Central Bank and the Federal Reserve. A stronger currency lowers the cost of South Africa’s imports including oil, which has declined 26% since reaching a 2018 peak of $86.74 a barrel in October.

Annual inflation for May was 4.5%, the midpoint of the central bank’s target band of 3% to 6%, the statistics agency said yesterday. The bank sees price growth averaging 4.5% in 2019, and its forecasting model suggests there might be room for interest-rate cuts in the next year or two, given how weak the economy is, Governor Lesetja Kganyago said June 13. Gross domestic product in Africa’s most industrialised economy contracted the most in a decade in the first quarter.