South African Rand: SARB hikes again but environment stays tough – Commerzbank

Commerzbank’s Volkmar Baur reports the South African Reserve Bank (SARB) raised its benchmark rate by 25 bps to 7.25%, the second hike this year as earlier expectations for cuts faded with higher Oil prices. Despite the move, South African Rand (ZAR) weakened, largely on Dollar strength. SARB sees upside inflation risks but a high bar for further hikes, while US rates and local elections keep ZAR’s outlook challenging.

Higher SARB rates, still pressured Rand

"At its meeting yesterday, the South African Reserve Bank (SARB) raised the benchmark interest rate once again by 25 basis points to 7.25%. This marked the second rate hike this year following the one in May, even though rate cuts had been expected at the beginning of the year. However, these expectations have fallen by the wayside in recent months due to the Iran conflict and the resulting rise in oil prices."

"The ZAR nevertheless fell by just over 1% yesterday. However, most of this decline occurred before the interest rate decision was announced and was therefore not driven by it. On the contrary, in the wake of the rate hike, the exchange rate appeared to stabilize, with yesterday’s rise likely driven more by a stronger US dollar."

"The SARB and Governor Kganyago tried to sound resolute during the press conference. It became clear, however, that South Africa’s economy is suffering from the effects of the Iran conflict. Downside risks were identified for growth, while inflation risks were seen as tilted to the upside. This issue will continue to preoccupy the SARB in the coming months."

"At the same time, it became apparent that the bar for another rate hike is likely set somewhat higher. In its baseline scenario, the SARB currently does not foresee another rate hike, even though it expects inflation to rise to over 5% (from the current 4.4%) year-over-year. Only an even sharper rise could prompt the SARB to take another rate hike."

"All in all, this is not currently an environment in which we would expect positive developments for the ZAR. Rising interest rate expectations in the US could put further pressure on the ZAR in the coming weeks, and with local elections in November, a political risk is also looming."