South African Rand: SARB hike and hawkish tone – Commerzbank

Commerzbank’s Volkmar Baur expects the South African Reserve Bank (SARB) to deliver a 25 basis point rate hike after surprising markets by holding rates in July. With growth cooling, inflation pressures persisting and fuel and food risks elevated, he argues SARB should not only raise rates but also sound hawkish, as a softer stance could weigh on the Rand.

Rate hike likely as inflation risks persist

"When the South African Reserve Bank last met for a monetary policy meeting on July 23, the market and most analysts firmly expected an interest rate hike. And for tomorrow, Wednesday, most analysts are again anticipating a 25-basis-point rate hike, which the market has already fully priced in."

"The signs are similar, but the circumstances are quite different. And the outcome is likely to be different as well. In July, the SARB left the key interest rate unchanged, contrary to expectations. On Wednesday, however, it is likely to raise rates."

"When the SARB met in late July, the Iran conflict had just flared up again. The hope at the time was that this episode, too, would pass quickly and that oil prices would fall again soon. Unfortunately, that has not been the case in recent months. Consequently, the SARB finds itself in a more difficult position this week."

"Growth has recently cooled more than expected due to the ongoing conflict, while inflationary pressures persist. Although the August inflation figures will not be released until Wednesday, the annual rate is likely to rise further."

"Gas prices alone are expected to account for about 0.8 percentage points of the annual rate, a figure that is likely to increase further in September depending on oil prices. A look at the core rate (expected to be 4.2%) shows, however, that it, too, remains too high. The central bank’s target is 3%, with a tolerance band of one percentage point above and below that level."

"Following its last meeting, the central bank stated that one risk scenario is that the oil price could rise above USD 100 per barrel again, which would require a response in the form of another interest rate hike. We would say that the SARB would likely be well advised not only to raise interest rates on Wednesday but also to adopt a hawkish tone. Otherwise, the ZAR could suffer again."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)