If the political noise tones down, the Reserve Bank may be ready to cut rates
A stronger rand and falling inflation expectations may allow South African Reserve Bank governor Lesetja Kganyago to start cutting interest rates in 2017 as long as political developments do not derail the currency’s gains. Higher commodity prices and the end of a severe drought have improved prospects for an economy that probably expanded at the slowest pace in seven years in 2016. This has boosted the rand and led to an expectation of lower inflation, even as political risks, such as the possibility that Finance Minister Pravin Gordhan may be replaced, still remain. Forward-rate agreements starting in nine months, used to speculate on borrowing costs, show traders have started pricing in cuts in the repurchase rate. Break-even rates, a measure of inflation expectations, have fallen 18 basis points in 2017 and were below the top end of the central bank’s 3%-6% target band at least three times this year. The Reserve Bank has said it may be close to the end of the tightening cycle th...
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