Traders pared bets on interest-rate hikes by the South African Reserve Bank (Sarb) after inflation quickened less than expected and may ease in coming months, following a US-Iran deal to reopen the Strait of Hormuz.
Forward-rate agreements are pricing in 14 basis points of tightening when the Sarb delivers its policy decision on July 23, down from 16 basis points before the data.
Contracts covering the last policy meeting of the year in November are pricing in 25 basis points of tightening compared with 34 basis points before the data, implying the rate-hike cycle will peak at 7.25%.
Consumer prices rose 4.5% compared with 4% in April, Pretoria-based Statistics South Africa said in a statement on its website Wednesday. That was the highest level in almost two years but below the median estimate of 4.7% in a Bloomberg survey of 18 economists.
Core inflation, closely watched by the central bank for signs of second-round price pressures, accelerated to 3.8% from 3.6% in the previous month. The bank targets inflation at 3% with a percentage point tolerance band on either side.
Despite the pickup in inflation, policymakers may decide they have room to leave the benchmark interest rate unchanged at their next meeting after raising it to 7% from 6.75% last month.
An interim agreement between the US and Iran to reopen the strait has helped ease oil prices, reducing the risk of renewed energy-driven inflation pressures.
The waterway handled about a fifth of global seaborne oil trade and a third of fertiliser shipments before the US and Israel attacked Iran in late February.
Inflation should stabilise through year end, said Yvonne Mhango, Bloomberg Africa economist.
“A durable US-Iran peace deal that keeps oil prices contained would support that path,” she said. “The South African Reserve Bank will therefore likely hold rates through year end.”
Brent crude prices have sank 8% since details of the deal emerged over the weekend to about $80 a barrel and are down 30% from last month’s highs.
Governor Lesetja Kganyago earlier this month declined to signal the path of future borrowing costs, saying policymakers would continue to assess incoming data.
“I cannot tell you now if more” rate hikes will be needed, “or how much,” he said.
“We take our decisions meeting by meeting. But the policy objective should be crystal clear. We are committed to low and stable inflation.”
Higher housing and utilities and transport prices were the main drivers of the acceleration in inflation.
