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By Bloomberg

The falling oil price may offset the effect of the slumping rand on inflation, reducing the South African Reserve Bank’s need to raise interest rates.

Market expectations of 2015’s first rate increase in May, shown by a 21 basis-point increase this month in forward-rate agreements starting in five months, could be overdone because declining oil costs will contain consumer prices, according to Jana van Deventer, an economist at ETM Analytics.

“Our argument is that the initial reaction to the weakening of the rand is too aggressive,” she said by phone from Johannesburg on Dec. 17. “Short to medium-term inflation risks are still contained.”

The 46 percent slump in Brent crude oil since June helped push inflation back within the central bank’s 3 percent to 6 percent target band in September, earlier than forecast. That’s allowed policy makers to keep interest rates on hold since July at 5.75 percent to support an economy set to grow at the slowest pace since the recession in 2009.

Gasoline prices in Africa’s second-largest economy fell 13 percent since August to the lowest in 19 months. Costs may drop another 8 percent next month as the lower oil price outweighs the effect of the weaker currency, said Moshabele Modise, an investment analyst at Citadel Investment Services. Transportation costs contribute 16 percent to the consumer price index and inflation slowed to 5.8 percent in November from 5.9 percent a month earlier.

Influence Decision

The rand depreciated 4 percent this month as investors sold emerging-market assets before the Federal Reserve raises interest rates. Most officials see the first U.S. increase taking place next year, according to quarterly forecasts released yesterday of the Federal Open Market Committee participants’ assessments of appropriate monetary policy.

While Fed Chair Janet Yellen said this week she’s unlikely to increase rates before the end of April, U.S. tightening may prompt the Reserve Bank to increase its own rates sooner, Elna Moolman, an economist at Macquarie Group Ltd., said by phone from Johannesburg yesterday.

“If the Reserve Bank is very worried about what it sees happening with the rand and what could possibly happen with the rand, especially when the Fed starts raising interest rates, that could influence its decision,” she said.

‘Positive Impact’

Forward-rate agreements starting in five months, used to speculate on borrowing costs, signal 28 basis points of increases at the May Monetary Policy Committee meeting, data compiled by Bloomberg show. One-year interest-rate swaps, used to lock in borrowing costs over the period, have risen 21 basis points this month to 6.37 percent, compared with a four basis- point decline in Poland.

The rand gained 0.3 percent to 11.5473 per dollar as of 8:38 a.m. in Johannesburg. Yields on government rand bonds due December 2026 fell 11 basis points to 8 percent yesterday.

“The effect of the oil price has overwhelmed the weakening of the currency,” Citadel’s Modise said by phone from Cape Town yesterday. “You would really need a far sharper depreciation of the currency and over much more sustained period of time for it to offset the positive impact of the oil price on inflation.”