Rand breaks through R14/$ as Reserve Bank maintains that next rates move is up

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South Africa’s central bank stuck to the message that its next interest-rate move will be up, as it looked beyond a temporary pickup in inflation to keep the benchmark at 3.5% for a fifth straight meeting.

The implied policy rate path of the central bank’s quarterly projection model still indicates a 25 basis-point increase in the second quarter and in the fourth quarter of this year.

By early evening, the rand breached the R14/$ for the first in more than week. Earlier this week, the currency weakened to R14/18. The prospect of higher interest rates is positive for the rand.

However, Governor Lesetja Kganyago said the policy stance will remain accommodative, even with steps to normalise interest rates, indicating that tightening could be gradual.

The central bank trimmed its inflation forecast for this year and continues to project the rate of price growth close to the 4.5% midpoint of its target range through 2023. However, risks to this outlook are to the upside and include higher domestic import tariffs and escalating wage demands, Kganyago said.

"The change in balance of risks to the inflation and more hawkish forward-guidance suggest a possible rate increase by year-end. The pace at which rates are increased, though, is likely to remain slow. SARB will probably raise in small increments in order to keep interest rates relatively low compared with pre-pandemic levels."
— Boingotlo Gasealahwe, Africa economist

The rand extended its advance against the dollar. It traded 0.83% stronger at 13.9878 by 5:40 p.m. in Johannesburg. Yields on local-currency bonds due January 2030 were 9 basis points lower at 9.04%. Forward-rate agreements starting in six months pared some of the bets for rate hikes this year, and now pricing in a 65% probability that the repurchase rate will be 50 basis points higher.

Economists are less convinced and Bloomberg’s monthly survey shows they see the rate staying unchanged until the end of the year.

"Data wise there is no indication for rates to be hiked this year," said independent economist Elize Kruger. "Inflation remains well under control. We’ve got an economy that’s still struggling to recover from last year’s recession and Covid-19 impacts."

The central bank raised it economic growth forecast for this year to 4.2% from 3.8%, largely due to a strong commodities outlook. It lowered the estimate for 2022 to 2.3% and to 2.4% for the following year.

The Reserve Bank’s hawkish stance is likely to draw criticism from politicians and labor unionists, who say it should be doing more to support the economy and reduce unemployment that’s at a record high.

The central bank cut the key rate by 300 basis points last year. Its contribution to an economic recovery will now be predictable policy, according to Deputy Governor Kuben Naidoo.

“You need low, predicable rates during the recovery to support economic activity, to encourage people to lend, to encourage businesses to invest,” he told reporters. “That’s the contribution of the SARB during a crisis.”

- With assistance from Simbarashe Gumbo, Colleen Goko, Leah Wilson and Mike Cohen. Additional reporting by Fin24.

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