Investors bet on Marcus hiking rates further

Investors are betting Reserve Bank Governor Gill Marcus will stick to her promise to rein in inflation by raising interest rates again even as the economy is threatened with a recession.

Forward rate agreements, used to speculate on borrowing costs, are signalling another 25 basis point increase at the central bank’s next meeting in two months after the monetary policy committee (MPC) lifted the benchmark by 25 basis points to 5.75 percent on Thursday. The rand strengthened as much as 0.7 percent against the dollar after Marcus said policymakers were in a “rate-hiking cycle”.

“The bank can’t afford to cry wolf,” Asief Mohamed, the chief investment officer of Aeon Investment Management, said last week. “They will have to keep raising gradually to protect their credibility.”

Inflation has exceeded the central bank’s 3 percent to 6 percent target in April and May and the bank only sees the measure falling below the upper band in the second quarter of next year.

Marcus said a weak rand, high wage settlements and rising food costs posed a risk to the consumer price outlook, while growth was subdued.

Marcus said: “The MPC faces an increasingly difficult dilemma of rising inflation and slowing growth. Monetary policy should not be seen as the growth engine of the economy. The sources of the below-par growth performance are largely outside the realms of monetary policy.”

The yield on the rand-denominated bond maturing in September 2015 rose 3 basis points to 6.65 percent on Thursday, while similarly dated debt for Turkey, which cut its benchmark rate by 50 basis points, increased two basis points.

She cut her growth forecast to 1.7 percent, from 2.1 percent at the MPC’s last meeting in May, after the economy contracted in the first quarter following a five-month strike at platinum mines. – Bloomberg