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According to Mahlobo two local markers are signalling a hike. The first is that the balance of economists appears to be pencilling in a hike. The second is that the Forward Rate Agreement market is now signalling roughly one 25 basis point increase over the next month.

Forward Rate Agreements, commonly known as FRAs, are financial contracts used by banks, pension funds, insurers, asset managers, and large companies to hedge against future interest-rate movements. They allow institutions to effectively lock in an interest rate today for borrowing or lending that will take place at a future date.

Because real money is placed behind these contracts, FRA markets are closely watched by economists and central banks as a live measure of what professional investors believe interest rates are likely to do in coming months.

When FRA pricing rises, it generally signals that markets expect the Reserve Bank to raise rates. When it falls, markets are signalling expectations for cuts or a more accommodative stance.

Mahlobo says current FRA pricing suggests that professional investors are increasingly positioning for a 25-basis point increase in South African rates.

However, he argues that the SARB may instead hold on rates at the end of May and remain guided primarily by the official domestic inflation number – and the fact that that the currency has strengthened by just under 10% over the past year on the back of a weaker US dollar, thereby moderating imported good prices.

His expectation is that headline consumer price inflation will rise to near 4% year-on-year for April. That would place the inflation marker well above the Bank’s preferred 3% target, but still within, or very close to, the Reserve Bank’s official tolerance range (of one percentage point).

On that basis, Mahlobo cautions that the MPC may hold the repo rate steady at 6.75% on 28 May.

Mahlobo stresses that inflation and higher prices have to be distinguished from each other. The former is a consequence of central bank printing that increases the amount of money in a country faster than the rate at which the economy expands thereby undermining the value of that money. Central banks fight this by hiking interest rates in the hope that this will deter spending and borrowing. However, price increases caused by other external issues, such as global oil prices, are not technically the same as inflation and are immune to rate hikes – even though both narrowly defined inflation and more broadly defined price increases squeeze consumers.

Mahlobo says it is frustrating that this distinction is not understood and that the two issues are often conflated.

Over the longer term he says that regardless of that distinction international crude prices may force the bank’s hand. If the inflation marker for South Africa looks set to rise well above 4% the bank will likely hike, even though that will do nothing to tame energy price-induced consumer price increases.