South Africa's Rand Rises as Credit Growth Boosts Rate Outlook

By Garth Theunissen

July 29 (Bloomberg) -- South Africa's rand strengthened against the dollar for a third day after a report showed credit growth unexpectedly accelerated, giving the central bank more reason to raise interest rates.

The rand offered the best returns from the so-called carry trade among its 16 most active counterparts after the Pretoria- based central bank said today credit growth in Africa's biggest economy grew 20.3 percent last month. It was forecast to increase 19 percent, according to the median estimate of 16 economists surveyed by Bloomberg.

``The rand has been amazingly resilient and the carry trade is a key factor,'' said Robert Beange, an emerging-markets currency strategist at JPMorgan Chase & Co. in London. ``The higher credit numbers would further encourage carry-trade inflows.''

The rand gained as much as 0.8 percent to 7.4780 per dollar and traded at 7.4825 by 11:11 a.m. in Johannesburg, from 7.5397 yesterday. It strengthened 0.8 percent versus the euro to 11.7733 and was the best performer versus the dollar of the 16 most-actively traded currencies monitored by Bloomberg today.

Growth in borrowing by South African households and companies rose from 19.7 percent in May, the central bank said, as interest rates at their highest in five years failed to curb credit demand. The broad M3 measure of money supply rose an annual 20.1 percent in June, compared with 20.9 percent in May, the central bank said, in line with the median estimate of economists surveyed by Bloomberg.

`Much Debate'

The South African Reserve Bank, led by Governor Tito Mboweni, has increased the key rate 10 times since June 2006 to curb inflation that has exceeded its 3 percent to 6 percent target range for 14 straight months. Policy makers next decide rates on Aug. 14.

``The Reserve Bank would ideally want to see a much more convincing slowdown in credit demand in order to be comfortable with leaving rates unchanged in August,'' Kevin Lings, chief economist at Stanlib Asset Management, wrote in a note to clients today. ``There is likely to be much debate at the monetary policy committee meeting.''

South Africa's currency has risen for six straight weeks, climbing 8.4 percent since June 12, when the central bank raised its benchmark interest rate by a half-point to 12 percent. It has offered the best carry-trade return of all major currencies against the dollar, euro and yen over that period, according to data compiled by Bloomberg.

Inflation Report

In carry trades, investors borrow lower-yielding currencies such as the Swiss franc to buy higher-yielding assets, such as those denominated in rand, typically sending the target higher and earning the spread between the two. Traders take the risk currency moves will erase the profit. When carry trades diminish, investors would sell the rand to repurchase so-called safe-haven assets, such as the franc.

South Africa's main interest rate is 1,150 basis points above Japan's and 925 basis points higher than Switzerland's.

South African inflation will quicken to 11.3 percent in June from 10.9 percent the month before, according to the median estimate of 18 analysts surveyed by Bloomberg. Statistics South Africa will release its report on price growth tomorrow.

Government bonds fell, with the yield on South Africa's benchmark 13.5 percent security due September 2015 rising 3 basis points to 9.57 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net.