Lower inflation eases pressure on South Africa's central bank to match EM hikes
* Many EMs raising rates to fight capital outflows
* Investors pricing-in zero chance of SA rate hike Thursday
* Central bank under political pressure to lower rates
By Mfuneko Toyana
JOHANNESBURG, Sept 19 (Reuters) - South African forward
markets cut projections of a rate hike on Wednesday, after
inflation fell, as investors bet the central bank would hold
rates unlike some emerging market countries that have tightened
policy to support weakening currencies.
Brazil, Russia, Argentina and Turkey, dubbed the "BRATS"
economies for their high budget and current account deficits and
dependence on foreign capital flows, have all raised rates to
stem a selloff that has dragged their currencies to record lows.
The rand is down nearly 20 percent against the
dollar year-to-date, the worst performing currency after the
Argentinian peso and the Turkish lira. Bonds have also seen a
massive selloff, posting record outflows in June.
The rand was buoyed by data showing August inflation slowed
to 4.9 percent year-on-year from 5.1 percent.
Africa's most industrialised economy runs amongst the
largest budget and current account deficits in EMs.
It funds that gap through volatile portfolio flows and
public borrowing, both of which are at levels that have sparked
warnings from ratings firms and are also susceptible to poor
growth and high inflation.
However, investors on Wednesday put their money on rates
remaining on hold in 2018, arguing the South African central
bank would this week focus on the downward inflationary trend
rather than protecting the rand and bonds.
"The hawkish impetus in the market has naturally been pared
back, although the forward curve remains relatively elevated
suggesting the market still has a relatively hawkish monetary
policy outlook," said Halen Bothma of ETM Analytics.
Spot money market rates fell further towards the bank's 6.5
percent benchmark rate, and so did one and three-month
forward rates after inflation for August slowed closer
to the mid-point of the bank's target range.
Rate agreements due in one month were pricing in a close to
zero percent chance of higher rates at Thursday's meeting.
In August, in response to the economy sliding to its first
recession since 2009, the ruling African National Congress said
the bank needed to do more to stimulate economic
"The bank is going to have to perform a balancing act,
especially with the governing party saying that now more than
ever that fiscal and monetary policy will have to coordinate to
make sure that South Africa isn't pushed into stagflation," said
Bianca Botes, treasury manager at Peregrine Solutions.
(Editing by James Macharia and Kirsten Donovan)
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