The spike in crude oil prices, together with the rand’s slide since the attack on Saturday, has prompted traders to lower odds on a rate reduction to about even, from close to three-in-four at the end of last week.

Even though inflation has been anchored within the central bank’s target range for more than two years and economic growth is stagnant, the risks of rising fuel costs and a volatile rand will probably sway the Monetary Policy Committee to hold fire, according to Societe Generale SA. South Africa imports about 40% of its crude oil from Saudi Arabia, making it the most-exposed emerging markets to disruptions in oil supplies form the kingdom, the bank said in a separate note.

Oil risks prompt traders to pare South African rate cut bets
“The weight of factors that advocate for unchanged rates will likely prevail: the poor efficacy of rate cuts in stimulating growth at this juncture, the troubled external environment, exchange-rate volatility, and the desirability of a real policy rate buffer,” said Phoenix Kalen, the London-based director of emerging-market strategy at Societe Generale.

Forward-rate agreements starting after Thursday’s MPC meeting are pricing in a reduction of 13 basis points in the repo rate, or a 52% chance of a 25-basis-point cut. That compares with 18 basis points, or a 72% chance, last week. Four out of 18 economists in a Bloomberg survey forecast a cut to 6.25% — though most of those predictions were made before the oil attacks.

The rand has weakened 1.1% against the dollar this week, bringing its decline since the last policy meeting on July 19 — when the MPC cut its benchmark rate to 6.5%, from 6.75% — to 5.4%. The rand price of Brent crude oil, the benchmark for South Africa’s regulated gasoline prices, is 17% higher, largely thanks to this week’s jump.

Gasoline accounts for about 5% of South Africa’s inflation basket directly, and also affects the costs of other items including transport, food and consumer goods.

To contact the reporter on this story:
Robert Brand in Cape Town at [email protected]

To contact the editors responsible for this story:
Dana El Baltaji at [email protected]
Constantine Courcoulas