Bloomberg News

Bonds Gain on Speculation Rates to Stay on Hold; Rand Weakens

May 22, 2012

South African bonds gained for a fourth day, driving yields to the lowest in more than two weeks, on bets the central bank will maintain rates at three-decade lows as it prioritises growth over inflation. The rand declined.

The yield on the nation’s 6.75 percent bonds due 2021 retreated six basis points, or 0.06 percentage point, to 7.57 percent as of 2:55 p.m. local time, the lowest since May 4. South Africa’s currency slid 0.5 percent to 8.2685 per dollar.

The Monetary Policy Committee will leave its repo rate at 5.5 percent on May 24, according to the median forecast of 18 economists in a Bloomberg survey. The MPC will probably leave rates at that level at least until the third quarter of 2013, forward-rate agreements show.

“Our base case view for is for the MPC to keep its repo rate on hold for the next 12 months, with the first rate hike pencilled in at the earliest in the third quarter of 2013,” Michael Grobler, an analyst at Afrifocus Securities in Cape Town, said in e-mailed comments. “A rates-friendly MPC statement may lead to marginally lower bond yields.”

Investors are betting the MPC will prioritise growth over inflation when it starts a two-day meeting tomorrow to discuss interest rates. South Africa’s economic growth will be slower than forecast in the first quarter, Finance Minister Pravin Gordhan said May 18.

The consumer inflation rate probably quickened to 6.2 percent in April, from 6 percent the month before, a report tomorrow will say, according to the median estimate of 17 economists in a Bloomberg survey. The central bank’s mandate is to keep inflation in a 3 to 6 percent target range.

European ‘Uncertainty’

The rand depreciated before data that may show consumer sentiment in the euro area, South Africa’s biggest trading partner, slipped to a four-month low as the debt crisis weighs on economic growth.

A gauge of household sentiment in the euro area probably dropped to minus 20.5 this month from minus 19.9 in April, according to the median economist estimate in a Bloomberg News survey before the European Commission reports the figure today. That would be the lowest level since January. The euro area buys 22 percent of South Africa’s exports.

“With no market-moving data or events today, the focus remains on Europe,” Nomvuyo Guma, a currency strategist at Standard Bank Group Ltd. in Johannesburg, said in e-mailed comments. “The risk is that the rand continues to trade with a weaker bias while European Union uncertainty persists.”

The Organization for Economic Cooperation and Development said Europe’s debt crisis risks spiraling and seriously damaging the world economy.

‘Vicious Circle’

“The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth,” OECD Chief Economist Pier Carlo Padoan wrote in the organization’s semi- annual report on the global economy. Such a downside scenario “may materialize and spill over outside the euro area with very serious consequences for the global economy,” he said.

German Chancellor Angela Merkel said yesterday she won’t shy away from disagreeing with French President Francois Hollande at the EU summit beginning tomorrow in Brussels. Good cooperation “doesn’t exclude differing positions,” Merkel said in Chicago during a meeting of the North Atlantic Treaty Organization. Elsewhere in Europe, Greece is preparing for June 17 elections following an inconclusive May 6 ballot.

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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