The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

Markets are pricing in the possibility of an interest rate hike in 2018 as the rand falls, despite economists saying it is unlikely as inflation expectations have not breached the upper end of the Reserve Bank’s target range.

The rand has slumped nearly 9% against the dollar year to date, hurt by global risk-off sentiment and poor domestic economic data.

Capital Economics senior emerging markets economist John Ashbourne said the currency fall had raised speculation that policy makers would follow some emerging market countries that have started raising interest rates.

Some countries have moved as a pick-up in their economy or other factors push up inflation, while others are being forced to act to steady currencies.

Maintain  vigilance

A Reuters poll showed last week that economists expect the Bank to keep its repo rate unchanged at 6.5% until 2020.

"We think that markets are getting ahead of themselves by pricing in rate hikes…. We do not think that this is likely," Ashbourne said in a note. "Policy makers have explicitly said that they will not react to currency moves until they see a lasting effect on domestic inflation.

"And the pass-through between currency moves and inflation is weaker in South Africa than in many other emerging markets," he said.

The Bank said in May it would maintain its vigilance to ensure inflation remained within the 3%-6% target range and would adjust the policy stance if necessary.

The Bank forecasts consumer price inflation to average 5.1% in the fourth quarter of 2018 and 5.2% in the last quarters of 2019 and 2020. The next interest rate decision and inflation forecasts are due on July 19. The consumer price index slowed to 4.4% year on year in May as food price rises eased.

"A weaker currency makes [the central bank] more fearful but it depends on how it impacts inflation 12 months out," Citi economist Gina Schoeman said.

"We don’t think we will see rate hikes in 2018. It doesn’t mean there is no risk of it, and the market is correct to price for that," she said.