Interest rate relief coming for South Africa

South Africa is expected to lower interest rates, after the formal adoption of a 3% inflation target and the government’s display of fiscal discipline provided policymakers with room for easing.

Economists polled by Bloomberg see Governor Lesetja Kganyago’s monetary policy committee reducing the benchmark rate by 25 basis points to 6.75% at their meeting on Thursday.

Traders are betting on the same outcome, with forward rate agreements used to speculate on borrowing costs pricing an 84% chance of such a cut.

The decision of the South African Reserve Bank’s six-member panel shortly after 3 p.m. in Pretoria was expected to be unanimous, according to a separate Bloomberg survey.

A cut just a few weeks before the holiday season will cheer consumers and potentially provide more support to an economy that has delivered only tepid growth for the past decade.

The meeting follows Finance Minister Enoch Godongwana’s endorsement last week of a 3% inflation target, lending political backing to the central bank’s July move to anchor price growth at that level.

It previously aimed for the midpoint of a 3%-to-6% range that had been unchanged since 2000.

Godongwana’s declaration formed a key part of his mid-term budget, which showed stronger-than-expected revenue growth and restrained spending — prompting S&P Global Ratings to upgrade South Africa’s credit rating for the first time in two decades.

“National Treasury’s endorsement does generate stronger conviction around a path towards a lower inflation expectations,” said Keabetswe Mojapelo, economist at Rand Merchant Bank, who expects a 25 basis point decrease.

The adoption is also likely to result in the central bank lowering its inflation forecast, which will be updated on Thursday, largely on easing food prices.

“The trajectory that food prices is moving towards is less inflationary, the evidence is now in our faces that food prices are going down stronger,” Mojapelo said.

Data on Wednesday showed South Africa’s annual inflation accelerated at a slower-than-expected pace of 3.6%, compared with the median estimate of 3.7%, after food prices cooled.

The budget and ratings upgrade have stoked further gains in South Africa’s assets. The rand has advanced more than 9% against the dollar this year and the yield on the benchmark 10-year bond has declined around 165 basis points to 8.67%.

The improvement in public finances also lessens the risk of fiscal dominance — when monetary policy is constrained by loose government spending, said Koketso Mano, an economist at First National Bank, who expects the central bank to hold rates, with a slim chance of a 25-basis-point cut.

“The backing of the 3% with a one percentage point tolerance really speaks to Treasury also willing to manage their own price mechanisms in line with this new target,” Mano said.

“When you also consider the S&P upgrade, I think all of those really just speak to maybe policy not having to be as restrictive.”