South Africa's SARB's repo rate likely to reach 7.5% by 2017

SARB delivered its second hike in this year in November MPC meeting. Market expects 125bp worth of hikes additional in coming 2 years, which brings the rate to around 7.50%.

"Our economists also expect the repo rate to be at 7.50% by the end of 2017, but we see value in paying the 2x5 FRA at 6.67%, because we believe there is more than a 50% probability that the SARB hikes policy rates by another 25bp at the January MPC meeting, especially if there is a disorderly market reaction to this month's FOMC meeting", says Barclays in a research note. 

Particularly, US Fed is highly expected to begin its rate-hiking cycle with 25bp in December meeting, followed by two more such hikes in 2016 and 2017.

Even if South Africa's Q3 15 GDP growth rate is below SARB's potential growth estimate, the risk is still skewed in favor of more bullish rate expectations, as SARB's desire to fix inflation expectations became more acute, ad concerns around growth became prominent in recent months.