(Bloomberg) — Traders bet that South Africa’s central bank will deepen its cycle of interest rate cuts after inflation slowed more than expected in October.

Forward rate agreements, used to speculate on borrowing costs, are now seeing declines of 71 basis points over the next 12 months, down from 64 as of Tuesday’s close. This is after statistics office data showed the annual inflation rate cooled to 2.8%, from 3.8% the previous month – its lowest level since June 2020. The result was better than the 3% median estimate of 15 economists in a Bloomberg survey. .

The benchmark stock index rose, led by retailers, while the yield on two-year government bonds fell six basis points. The rand weakened against the dollar.

The slowdown to below the lower end of the central bank’s 3-6% inflation target range will likely persuade its Monetary Policy Committee to ease monetary policy for the second time in as many months. The 20 economists interviewed as part of a Bloomberg survey expect the MPC to reduce its key rate by a quarter of a point on Thursday, to 7.75%.

But with the gap between the South African Reserve Bank’s policy benchmark and the annual inflation rate reaching 5.2%, an exceptionally restrictive level for an economy getting by with growth below 1%, the Independent economist Elize Kruger said the MPC had many reasons to reduce its borrowing. costs of 50 basis points.

Falling fuel prices are the main factor behind the slowdown, the statistics office said. Gasoline and diesel prices fell by 5.3% between September and October, bringing the annual fuel rate down to -19.1%, according to the release. Annual food and non-alcoholic beverage inflation also slowed to 3.6%, its lowest rate since 2019.

Nonetheless, Governor Lesetja Kganyago will likely reiterate that future decisions will depend on data and the emergence of new inflation risks.

The rand has depreciated by almost 3% against the dollar since Donald Trump’s victory in the US elections. The currency was also undermined by risk aversion towards emerging market assets, after the war between Russia and Ukraine entered a dangerous new phase this week when Ukrainian forces waged their first strikes on a region bordering Russia using missiles supplied by the West.

–With the help of Simbarashe Gumbo.

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