Rand at best level in a month ahead of rates decision

The rand firmed almost 1.5% in early trade on Thursday ahead of an interest rate decision announcement by the SA Reserve Bank at 15:00.

Analysts say while rates will likely be kept on hold, the decision could go any way as the central bank's Monetary Policy Committee grapples with low growth, falling inflation amid high fuel prices, as well as outside pressure as emerging market peers hike rates.

The rand reached its best level in a month, strengthening to below R14.50/$ from R14.69 at the opening of trade.

By 09:39, the local unit was trading 1.61% firmer at R14.45 to the greenback. Traders expect the currency to firm further should the MPC decide to hike rates or give a firm indication that it would hike at the next MPC meeting.

The surprise moderation in consumer inflation to 4.9% for August, announced on Wednesday, has however lifted the pressure somewhat on the MPC to increase the repo rate, currently at 6.5%.

External risks 'prevalent'

"Markets quickly realigned their rate expectations following the release with the FRA curve discounting a smaller possibility of a rate hike at today’s meeting compared to earlier in the week," said Nema Ramkhelawan-Bhana, head of global markets research at RMB.

She said the change in forex options pricing was instructive, with short-dated risk-reversals falling sharply, reflecting a smaller risk of a rand blow-out.

"Granted, the retracement of USD/ZAR to 14.70 coupled with Brazil and Hungary’s unchanged policy stances have lessened the probability of a rate hike today. But external risks to the rand remain prevalent, which means that the SARB could still lift rates by 25bp before the end of the year to safeguard the value of the currency."

According to Ramkhelawan-Bhana, the MPC will need to balance rand depreciation and an unexpectedly higher oil price against a widening output gap. "An interesting dilemma, as their inflation profile is already slightly elevated compared to consensus forecasts. The bottom line is that any upward revisions to their inflation projections will provide a compelling reason to hike rates."

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