Interest rate relief for South Africa

Traders have scaled back bets on additional South African interest-rate hikes after a US-Iran peace deal sent oil prices tumbling, potentially reducing inflationary pressures.

Forward-rate agreements are now pricing in 15 basis points of tightening at the South African Reserve Bank’s July 23 policy meeting, down from 30 basis points a week ago.

The contracts are pricing in a total of 32 basis points of rate hikes this year, compared with 70 basis points a week ago. That implies just one full quarter-point increase by the November rates meeting.

Policymakers last month raised borrowing costs by 25 basis points to 7%, delivering their first increase in three years as inflationary pressures intensified because of the Iran war.

They also signalled that further tightening may be warranted if the conflict drags on.

Inflation in Africa’s biggest economy probably quickened to 4.7% in May from 4% a month earlier, according to the median estimate of 18 economists in a Bloomberg survey. The central bank targets inflation at 3%.

Following the weekend’s peace agreement, however, investor expectations of average inflation over the next five years as measured by breakeven rates fell by 16 basis points to 4.23%.

Oil dropped after the news, even as details of the deal remained unresolved. Brent fell more than 4% toward $83 a barrel, after closing last week at the lowest in more than three months.

A gauge of Asian shares jumped more than 3% amid broad gains across the region, with Japan’s Nikkei 225 heading for a record close.

A deal will help dispel fears of an immediate return to a conflict that wreaked havoc on global energy markets and raised risks of an inflationary wave.

Iran shut the Strait of Hormuz shortly after bombardments by the US and Israel triggered the war, disrupting the conduit for what’s typically a fifth of the world’s supply of oil and liquefied natural gas.

The way-point for vessels entering and exiting the Persian Gulf remains heavily impeded, with crossings only a small fraction of prewar levels.