Traders Start Positioning for South African Rate Hike This Month

Interest-rate traders moved to price in a chance of a South African interest-rate hike later this month as the Iran conflict pushed oil prices higher, reviving concerns about inflation.

Forward-rate agreements are now anticipating a rate increase of six basis points at the March 26 policy meeting, or a 24% chance of a 25-basis-point hike. As recently as Friday, they were pricing in almost a 30% chance of a quarter-point cut.

The market is also less confident of monetary easing over the rest of the year. It’s now pricing in just 15 basis points of easing by year-end, compared with 39 basis points on Friday.

Brent crude oil rose above $80 a barrel on Tuesday as the US and Israel stepped up their attacks against Iran. That risks pushing inflation in South Africa further away from the central bank’s 3% target. The weakening rand could add to price pressures.

Policy makers “would most likely look through this if it’s a temporary shock, and not raise rates,” said Annabel Bishop chief economist at Investec Bank Ltd. Persistently higher inflation, however would force the central bank to tighten, though that is a “severe down case” scenario, she said.

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The rand extended declines on Tuesday, weakening 1.2% to 16.2937 per dollar as of 12:05 p.m. in Johannesburg. That brings its two-day drop to 2.2%.