Markets

South Africa Rate on Hold as Central Bank Warns of Rand Risk

Published

7 years ago

May 26, 2017

South Africa Rate on Hold as Central Bank Warns of Rand Risk

The South African Reserve Bank left its key rate unchanged for a seventh straight meeting as policy makers warned politics and ratings downgrades could still knock the rand and scupper an improving inflation outlook.

The Monetary Policy Committee maintained the benchmark repurchase rate at 7 percent, Governor Lesetja Kganyago told reporters Thursday in the capital, Pretoria. The decision was in line with the estimates of all 21 economists in a survey.

The key rate hasn’t changed for 14 months after the central bank raised it by two percentage points since 2014. The MPC has had to contend with swings in the rand after two ratings companies cut the debt of Africa’s most-industrialized economy to junk. This came after President Jacob Zuma fired Pravin Gordhan as finance minister, raising questions about political stability and stoking policy uncertainty before the ruling African National Congress elects new leadership in December.

“A reduction in rates would be possible should inflation continue to surprise on the downside and the forecast over the policy horizon be sustainably within the target range,” Kganyago said. “In the current environment of high levels of uncertainty, the risks to the outlook could easily deteriorate.”

Consumer inflation eased to 5.3 percent in April, the slowest pace in 17 months and the first time it’s been in the 3 percent to 6 percent target range since August. Price growth in March and April were below expectations, Kganyago said. The bank cut its forecast for the year to 5.7 percent from 5.9 percent and sees inflation remaining within the target range through 2019, he said.

As with the previous meeting, five MPC members voted for the rate to stay unchanged and one favored a 25 basis-point cut, Kganyago said.

“The Reserve Bank will probably only ease policy next year, because the forecast risk
is so high this year,” Elna Moolman, an economist at Macquarie Group in Johannesburg, said by phone. “It all comes down to the currency and the effect that will have on inflation.”

The rand strengthened 0.4 percent to 12.8568 per dollar by 4:49 p.m. in Johannesburg on Thursday. Yields on rand-denominated government bonds due December 2026 rose one basis point to 8.51 percent.

Political Uncertainty

While the rand is at a stronger level than a year ago, the outlook for the currency “and therefore the risks to the inflation outlook, will be highly sensitive to unfolding domestic political uncertainty, as well as decisions by the credit-ratings agencies,” Kganyago said.

South Africa’s economy expanded by 0.3 percent last year, the least since a 2009 recession. The MPC reduced its forecast for growth this year to 1 percent from 1.2 percent, and trimmed the outlook for 2018 to 1.5 percent from 1.7 percent. The reduction is because of the anticipated impact of the downgrades, he said.

Inflation expectations, as measured by the five-year breakeven rate, are near the lowest in more than two years.

Forward-rate agreements, used to speculate on borrowing costs, dropped as traders priced in a greater chance of policy easing. Contracts starting in a year fell to 6.86 percent, showing expectations of 47 basis points of rate cuts by the end of the period.

“It would be very brave to cut rates in a year that a reasonable person would expect that there would be turmoil, both locally and internationally,” Nicky Weimar, an economist at Nedbank Ltd. in Johannesburg, said by phone. “If there is a political resolution and the ANC heals itself, the rand could come roaring back” and there could be scope for cutting rates.

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Samed Olukoya

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

NNPC and Newcross Set to Boost Awoba Unit Field Production to 12,000 bpd

Published

2 hours ago

April 23, 2024

Samed Olukoya

NNPC and Newcross Exploration and Production Ltd are working together to increase production at the Awoba Unit Field to 12,000 barrels per day (bpd) within the next 30 days.

This initiative, aimed at optimizing hydrocarbon asset production, follows the recent restart of operations at the Awoba field, which commenced this month after a hiatus.

The field, located in the mangrove swamp south of Port Harcourt, Rivers State, ceased production in 2021 due to logistical challenges and crude oil theft.

The joint venture between NNPC and Newcross is poised to bolster national revenue and meet OPEC production quotas, contributing significantly to Nigeria’s energy sector.

Mele Kyari, NNPC’s Group Chief Executive Officer, attributes this achievement to a conducive operating environment fostered by the administration of President Bola Ahmed Tinubu.

The endeavor underscores a collective effort involving stakeholders from various sectors, including staff, operators, host communities, and security agencies, aimed at revitalizing Nigeria’s oil and gas sector.

Gold

Gold Prices Slide Below $2,300 as Investors Digest Fed’s Rate Outlook

Published

3 hours ago

April 23, 2024

Samed Olukoya

Amidst a backdrop of global economic shifts and geopolitical recalibration, gold prices dipped below the $2,300 price level.

The decline comes as investors carefully analyse signals from the Federal Reserve regarding its future interest rate policies.

After reaching record highs earlier this month, gold suffered its most daily decline in nearly two years, shedding 2.7% on Monday.

The recent retreat reflects a multifaceted landscape where concerns over escalating tensions in the Middle East have eased, coupled with indications that the Federal Reserve may maintain higher interest rates for a prolonged period.

Richard Grace, a senior currency analyst and international economist at ITC Markets, noted that tactical short-selling likely contributed to the decline, especially given the rapid surge in gold prices witnessed recently.

Despite this setback, bullion remains up approximately 15% since mid-February, supported by ongoing geopolitical uncertainties, central bank purchases, and robust demand from Chinese consumers.

The shift in focus among investors now turns toward forthcoming US economic data, including key inflation metrics favored by the Federal Reserve.

These data points are anticipated to provide further insights into the central bank’s monetary policy trajectory.

Over recent weeks, policymakers have adopted a more hawkish tone in response to consistently strong inflation reports, leading market participants to adjust their expectations regarding the timing of future interest rate adjustments.

As markets recalibrate their expectations for monetary policy, the prospect of a higher-for-longer interest rate environment poses challenges for gold, which traditionally does not offer interest-bearing returns.

Spot gold prices dropped by 1.2% to $2,298.67 an ounce, with the Bloomberg Dollar Spot Index remaining relatively stable. Silver, palladium, and platinum also experienced declines following gold’s retreat.

The ongoing interplay between economic indicators, geopolitical developments, and central bank policies continues to shape the trajectory of precious metal markets.

While gold faces near-term headwinds, its status as a safe-haven asset and store of value ensures that it remains a focal point for investors navigating uncertain global dynamics.

Crude Oil

Oil Prices Hold Firm Despite Middle East Tensions

Published

3 hours ago

April 23, 2024

Samed Olukoya

Despite ongoing tensions in the Middle East, oil prices remained resilient, holding steady above key levels on Tuesday.

Brent crude oil traded above $87 a barrel after a slight dip of 0.3% on the previous trading day, while West Texas Intermediate (WTI) hovered around $82 a barrel.

The stability in oil prices comes amidst a backdrop of positive sentiment across global markets, with signs of strength in various sectors countering concerns about geopolitical tensions in the Middle East.

One of the factors supporting oil prices is the weakening of the US dollar, which makes commodities priced in the currency more attractive to international investors.

Concurrently, equities experienced gains, contributing to the overall positive market sentiment.

However, geopolitical risks persist as Israel intensifies efforts to eliminate what it claims is the last stronghold of Hamas in Gaza and secure the release of remaining hostages.

These actions are expected to keep tensions elevated in the region, adding uncertainty to oil markets.

Despite the geopolitical tensions, options markets have shown a more optimistic outlook in recent days regarding the potential for a spike in oil prices. This suggests that market participants are cautiously optimistic about the resolution of conflicts in the region.

Despite the lingering risks, oil prices have remained below the $90 per barrel price level, a level that many analysts consider significant, particularly as the summer months approach, typically known as the peak demand season for oil.

While prices have experienced some volatility, they have yet to reach the $90 threshold, prompting expectations of further increases later in the year.

Jeff Currie, chief strategy officer of energy pathways at Carlyle Group, expressed confidence in the potential for oil prices to surpass $100 per barrel, citing tight market conditions indicated by timespreads.

However, he also noted the importance of monitoring OPEC’s response to rising prices, as the organization may adjust production levels to stabilize the market.

Overall, while geopolitical tensions in the Middle East continue to pose risks to oil markets, the resilience of oil prices amidst these challenges underscores the complex interplay of global factors influencing commodity markets.