SA Rand: Next SARB Rate Rise Only in November say Bank of America

Stable inflation, a steady exchange rate and threats of an economic slowdown are likely to keep interest rates unchanged at South Africa’s central bank this month.

According to a recent research note released by Bank of America Merrill Lynch Global Research the next move on interest rates will come in the form of a 25bps hike in November. Further interest rates should take the rate to 7% by the end of 2016.

Interest rate rises tend to be a positive for currencies – in the case of South Africa the rand is bid higher as global currency flows into the country to profit on higher yields.

If Bank of America are correct then there is the risk that the Rand weakens through the remainder of 2015, we have already warned that there are technical signs that the pound to rand exchange rate (GBP-ZAR) appears keen to attack the 20.00 level.

If no rate cuts are announced we see the prospect of this exchange rate being achieved increase in likelihood.

It is worth pointing out that while all 24 economists polled by Bloomberg see no interest rate cut in May, interest rate futures markets market are pricing in a 70% chance of a +25bp hike to 6.00%.

The most obvious reason for this view is the SARB taking a definite step closer toward renewing its rate hike cycle at the 26 March MPC meeting when it warned that the “room to pause” in the process of interest rate normalisation had “narrowed” given the deterioration in the inflation outlook.

“That said, since the March MPC meeting, the domestic growth outlook has dimmed a little further on widespread electricity loadshedding in April, the market has pushed out its pricing for the first Fed hike to October (our call is still September) and the Rand has remain relatively stable, all of which signal little pressure for the SARB to hike this week already, in our view,” says BofA’s Matthew Sharratt in Johanessburg.

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Exchange Rate vs US Dollar Stable

The value of the rand against the US dollar will be important – the SARB would look to defend the ZAR by raising interest rates should it fall too far.

The Rand has been relatively resilient given growing concerns about US economic data and the market pushing out the timing for the Fed lift-off to October. BofA observe that the nominal effective exchange rate is only 0.5% lower than the March average while USDZAR is actually lower by just over 1% over the same period.

As such, with USD-ZAR stable we could see GBP-ZAR notch up further gains in the background as the SARB will most certainly be more interested in the former.

“We believe that the SARB will ultimately remain cautious for now amid a challenging economic outlook, uncertainty over the timing for the first Fed hike and a relatively stable Rand. We look for the next +25bp hike to 6.0% in November but acknowledge that unexpected Rand weakness could still see an earlier move from the SARB. We see repo at 7.00% by end-2016,” says Sharratt.