Bloomberg News

Investors Increase Bets South Africa to Follow ECB on Rate Cut

November 07, 2011

Nov. 4 (Bloomberg) -- South African bonds gained for a third day, driving four-year yields to the lowest in two months, as investors bet the Reserve Bank will follow its European counterpart in cutting rates as the global economy slows.

The yield on 13.5 percent securities due 2015 fell seven basis points, or 0.07 percentage point, to 6.44 percent, the lowest since Sept. 8, at 1:43 p.m. in Johannesburg. The yield difference, or spread, between four-year securities and 15-year bonds widened 11 basis points to a record 1.83 percentage point today, an indication investors expect short-term rates to fall and growth to slow.

South African Reserve Bank policy makers will make the next rates decision on Nov. 10, after the European Central Bank unexpectedly cut interest rates at Mario Draghi’s first meeting in charge yesterday, citing slowing growth in the 17-member euro region. The Reserve Bank is “ready to act” should the global economy deteriorate, Governor Gill Marcus said on Sept. 22.

“Given South Africa’s open economy and with Europe being our largest trading partner, we believe the South African economy will be impacted” by the ECB decision, said Michael Grobler, a Cape Town-based analyst at Afrifocus Securities. “With Reserve Bank officials already very dovish and the inflation outlook likely to improve in the first and second quarters of 2012, the stage is set for further easing.”

The Reserve Bank has kept its repo rate at 5.5 percent for the past year and will leave it unchanged next week, according to all 10 economists in a Bloomberg survey. The bank is likely to cut the rate by 50 basis points in March, Grobler said.

Yield Moves

Forward-rate agreements fixing three-month interest in six months dropped 15 basis points, or 0.15 percentage points, in the past two days to 5.12 percent, the lowest on record. Bonds rallied, driving the yield on four-year government securities to the lowest in two months.

“This move in South African yields comes at an interesting juncture” ahead of the rates meeting, Benoit Anne, the London- based head of emerging-markets strategy at Societe Generale SA, said in e-mailed comments. “The market may speculate that the Reserve Bank could take its cue from the ECB,” although SocGen doesn’t believe a rate cut is imminent, he wrote.

Consumer prices rose 5.7 percent in September from 5.3 percent in August as higher fuel prices and a weaker currency boosted costs, the Pretoria-based statistics office said on Oct. 19. The central bank, which aims to keep inflation between 3 and 6 percent, has forecast inflation will breach the top end of the target range in the fourth quarter before slowing next year.

The Treasury cut its forecast for growth in 2012 to 3.4 percent, from an estimate of 4.1 percent in February. The economy expanded an annualized 1.3 percent in the second quarter, the slowest pace in about two years.

“The Reserve Bank is likely to leave the rates unchanged at its meeting next week, but we expect them to sound very dovish, which should push rates lower,” Bartosz Pawlowksi, a London-based analyst at BNP Paribas, said in a research note.

--Editors: Peter Branton, Tim Farrand

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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