What rand, inflation could do rest of the year

Cape Town - The rand could remain volatile well into year end, while interest rates are likely to remain on hold for the rest of the year, according to Sanisha Packirisamy, economist at MMI Investments and Savings.

This is because MMI Investments views the scope for monetary easing as limited and expects political turbulence to gather momentum in the lead up to the ANC's National Executive Committee (NEC) meeting in December this year.

"Should fiscal prudence not be exercised and SA’s debt ratio continues to climb to more hazardous levels, further downgrades could very well be triggered. In this scenario, following a likely lower growth outcome, the currency could deteriorate further from current levels," said Packirisamy.

READ: Rand hits R13.70/$ amid oil price rout

She pointed out that for the SA Reserve Bank (SARB) the largest domestic risk is the threat of additional ratings downgrades.

"A further increase in uncertainty related to the direction of economic policy could, in the SARB’s view, trigger capital outflows. This, in turn, could further raise borrowing costs, push the rand weaker and put upward pressure on SA’s inflation outlook," explained Packirisamy.

As for inflation, if the likely lower growth leads to the rand deteriorating further, inflation prospects could rise to a more uncomfortable level, urging the SARB to raise interest rates to defend its inflation-targeting mandate, she cautioned.

In its April Monetary Policy Review, SARB has warned against a potential correction in financial markets. SARB flagged both domestic and external risk factors which could prompt a correction in financial markets in the near term.

The first risk is posed by the possibility of an upside surprise in US inflation data - accompanied by higher domestic demand underpinned by proposed sizeable tax cuts. This could prompt a faster-than-expected rise in US interest rates. SARB said a more rapid rise in US interest rates could negatively impact riskier assets.

SARB also worries that Chinese authorities may be forced to tighten policy more aggressively to address an overheating property market. Packirisamy said this would likely have negative repercussions for commodity prices and global market sentiment.

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