SARB Rate Cut Won't Stop South African Rand's Ascent

Image © Government ZA, Reproduced Under CC Licensing

The South African Reserve Bank (SARB) cut interest rates but warned that it remained cautious when considering further cuts, which should ensure that the Rand ultimately remains supported.

The South African Rand was broadly weaker after the decision by the SARB to lower the REPO rate by 25 basis points to 8.0%, but losses were limited by the tone struck in the guidance pertaining to future actions.

The central bank's governor, Lesetja Kganyago said, "you've got to be cautious; adventurism is not part of our monetary policy toolkit."

The Rand might have come under more sustained selling pressure had he encouraged the market to think the door was now ajar to a succession of subsequent interest rate cuts.

However, David Omojomolo, Africa Economist at Capital Economics, says Kganyago's hawkish tone is "overcooked" owing to the low inflation, sluggish growth backdrop that is likely to continue in the near term.

Capital Economics forecast the REPO rate to be lowered further at the upcoming meetings, with the repo rate ending next year at 6.25%, which is below the consensus.

If the market thinks the SARB will be more generous in its stance, the Rand could come under pressure.

Regarding the Rand's value, the SARB says Rand strength, coupled with a lower global oil price, has seen a notable decline in fuel price inflation.

The SARB has revised the implied starting point of USD/ZAR to R18.04 from R18.35/USD previously.

"This contributes to fuel price deflation, which helps keep headline below 4% through the first half of next year," said the SARB.

The SARB envisages the REPO rate will move towards a neutral rate next year, at which point it is neither stimulatory nor restrictive, "stabilising slightly above 7%”.

The Rand is meanwhile set to benefit from the tailwinds provided by the midweek cut to interest rates in the U.S. Rallying stocks and bullish investor sentiment are typically tailwinds for this emerging market currency.

An improved domestic political backdrop, restored electricity supplies and a hawkish central bank all suggest the conditions for further ZAR appreciation are in place.