Rising energy prices could lead to rate hikes in South Africa

Rising energy prices are fueling inflation expectations in South Africa, prompting traders to bet that rate increases are on the cards this year even as the economy remains in the doldrums.

Brent crude oil, which determines South African gasoline prices, climbed to the highest since May 2019 on Wednesday.

Together with an expected increase in electricity tariffs, that’s pushed breakeven rates – seen as a gauge of bond traders’ outlook for price rises – to the highest since April 2020.

The South African Reserve Bank has cut its policy rate five times since the beginning of last year to a record low to support an economy that contracted the most in nine decades last year.

The central bank’s quarterly projection model implies increases of 25 basis points in the second and third quarter of 2021. Still, policymakers emphasized last month that decisions would be data-dependent.

South African inflation quickens first time in three months

Price pressures, together with rising US Treasury yields, may force the central bank’s hand.

Forward-rate agreements are now pricing in 46 basis points of tightening this year, a turnaround from the beginning of the month when expectations were for the repo rate to remain unchanged at 3.5%.

Bond yields also suggest traders are positioning for rate hikes, with the curve bear-steepening as short-end yields rise faster than longer-term ones.

Yields on local-currency government bonds due February 2023 have climbed for 11 consecutive days, adding 18 basis points to trade at 4.82% as of 11h41 in Johannesburg Wednesday.

That’s the highest since July. Those on bonds maturing in 2040 have climbed 13 basis points in the same period.

Rising energy prices are fuelling inflation expectations in South Africa, prompting traders to bet that rate increases are on the cards this year even as the economy remains in the doldrums.


Read: A new reality in South Africa – we can’t pay our bills

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Rising energy prices could lead to rate hikes in South Africa