With the MPC having hiked the rate by 50bp, a smaller than expected increase, the rand is expected to remain under
pressure. The list of negatives stacked against the currency will likely outweigh policy rate support.
Adjusting for volatility, ZAR is not particularly attractive. Although it is the second highest-yielding currency in EM, much of the carry benefit is offset by its volatility.
The growth/inflation mix continues to deteriorate. In particular, constraints on power supply are likely to weigh on growth for some time, impairing manufacturers’ ability to take advantage of the weaker rand and raise production for export.
The current account deficit is [...]
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Tags: ZAR
The South African Reserve Bank disappointed markets by raising its repo rate by ‘only’ 50 bps today. Hawkish rhetoric from several MPC members in the run-up to the June meeting had encouraged market expectations for a more aggressive interest rate move, and a full 100 bps had been priced in. The SARB Governor himself had spoken of the need to take ‘drastic’ action to rein in inflation, and when pushed to explain what ‘drastic’ might mean, said that even 200 bps was possible. Unsurprisingly, the ZAR weakened sharply on the back of today’s rate decision.
While a 50 bps rate hike [...]
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Tags: South Africa
Mboweni’s comments
‘It doesn’t take a genius to know that rates are going up’. These comments by SARB Governor Tito Mboweni a few days ago, together with the admission that he had spoken to his MPC colleagues about the possibility of a 200 bps rate hike, triggered a sharp selloff in South African interest rate markets. Combined with the release of worse than expected inflation data for April (CPIX at 10.4% y/y), this sealed the case for a further interest rate hike in June. Despite the fact that the SARB had until then expressed a clear preference for gradual tightening, moving [...]
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Tags: South Africa
Evidence is mounting that tight monetary policy is finally slowing the economy.
Business confidence has slumped, house price growth has ground to a halt, retail sales are weak and there has been a modest slowdown in consumer borrowing. Electricity shortages also intensify the risk of a slowdown as rationing is planned while Eskom invests in new capacity.
Potential for a further 100bp in policy tightening to 12% this year is possible, as recent rand weakness reduces the likelihood that inflation will return to target by the end of this year. Break even spreads and survey data also point to higher inflation expectations, [...]
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Tags: ZAR
