SA inflation closer to US is good news for rand

The narrowing inflation differential between South Africa and the US signals long-term support for the rand and local-currency bonds, according to Standard Bank Group.

Consumer-price increases in SA's economy slowed to 4% in January, in the lower half of the SA Reserve Bank's 3% to 6% target range. That curbed the inflation differential with the US to below its ten-year average.

"This partly reflects the SARB's success in anchoring domestic inflation," said Thanda Sithole, a Johannesburg-based economist at Standard Bank, in a note to clients.

"According to our inflation forecast as well as the US consensus inflation forecast, this differential will likely remain below 3.5%. And, from a fundamental perspective, that should support both the rand and South African bonds."

Yields on government bonds due December 2026 have decreased 16 basis points since the beginning of the year, while the rand has gained 0.6% versus the dollar in the same period. The rand was trading at R14.2665/$ by 11:40 in the morning in Johannesburg, while yields on benchmark bonds traded at 8.75%.

Standard Bank said, while it had trimmed its inflation forecasts for this year, inflation was unlikely to decline enough to incur interest rate cuts. The bank foresees steady rates in 2019.

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