Traders expect easing inflation to prompt South African rate cut

Traders are betting that inflation will slow toward the midpoint of the range targeted by South Africa’s central bank, giving policymakers room to extend their rate pause and eventually pivot to a cutting cycle.

The five-year breakeven rate, a market measure of price-growth expectation, fell to 5.07% on Tuesday, the lowest since 14 February.

The South African Reserve Bank’s target range is 3% to 6%, which is where it prefers to anchor expectations.  

Market bets are converging with economists’ forecasts that South Africa’s central bank will leave the benchmark rate unchanged for a third straight meeting while price pressures ease. 

Options trading reflects expectations the monetary committee will leave borrowing costs at 8.25% on Thursday, with about a 10% chance assigned to a rate cut.

That mirrors a unanimous view among 22 economists in a Bloomberg survey, most of which only anticipate rate cuts from the second quarter of next year. 

“The combination of steady policy rates over the next quarter, in a likely gradual downward CPI profile toward 5% by Q2 next year, may generate a better environment for ZAR rates and SAGB yields over the next couple of months,” said Citigroup strategists including Bhumika Gupta in a note to clients.

The firm is overweight South African local bonds.

The yield on notes due in 2035 has dropped six days in a row to trade at 11.53%, the lowest since July.

The past three weekly bond auctions, including Tuesday’s, have received orders in excess of R14 billion for the R3.9 billion worth of securities on offer, data from the central banks shows.