Traders now positioning for South African rate hike this month

Interest-rate traders moved to price in a chance of a South African interest-rate hike later this month as the Iran conflict pushed oil prices higher, reviving concerns about inflation.

Forward-rate agreements are now anticipating a rate increase of six basis points at the March 26 policy meeting, or a 24% chance of a 25-basis-point hike. As recently as Friday, they were pricing in almost a 30% chance of a quarter-point cut.

Read: Iran war oil shock threatens to disrupt Africa’s easing cycle

The market is also less confident of monetary easing over the rest of the year. It’s now pricing in just 15 basis points of easing by year-end, compared with 39 basis points on Friday.

Brent crude oil rose above $80 a barrel on Tuesday as the US and Israel stepped up their attacks against Iran. That risks pushing inflation in South Africa further away from the central bank’s 3% target. The weakening rand could add to price pressures.

Policy makers “would most likely look through this if it’s a temporary shock, and not raise rates,” said Annabel Bishop chief economist at Investec Bank. Persistently higher inflation, however would force the central bank to tighten, though that is a “severe down case” scenario, she said.

The rand extended declines on Tuesday, weakening 1.2% to R16.29 per dollar as of 12:05 p.m. in Johannesburg. That brings its two-day drop to 2.2%.

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