Rand price firm ahead of SARB rates decision

When is the SARB rates announcement?

The South African Reserve Bank is set to conclude its Monetary Policy Committee (MPC) meeting on Thursday the 24^th of March 2022 and in turn announce any changes to domestic lending rates.

Are local lending rates expected to increase?

It seems a foregone conclusion that rates will rise at the meeting. The Reserve Banks Quarterly Projection Model (QPM) had previously guided towards four rate hikes of 25 basis points (0.25%) in 2022.

Consensus estimates overwhelmingly expect a 25-basis point hike at the meeting, while there is an outside probability of a 50-basis point hike on Thursday.

The sudden more hawkish stance by developed market central banks, such as the US Federal Reserve, Bank of England (BoE) and European Central Bank (ECB) is seeing the timeline towards monetary tightening brought forward. This perhaps provides added incentive for the SARB to increase rates in congruence with its peers and try to limit capital outflows.

Inflation outlook

The inflation outlook becomes less clear with the heightened war induced volatility prevalent right now. Elevated oil and energy prices could see current assumptions to inflation revised higher, although this will be tempered against some supportive commodity prices as well as what has been a resilient domestic currency.

The current assumptions for Consumer Price Index (CPI) data suggest headline inflation for 2022 at 4.9%. However, inflation is tracking well above this right now with January and February data released by Statistics South Africa showing CPI on an annualized basis at 5,7%. Inflation has been forecast by the SARB at 4.5% in both 2023 and in 2024.

Growth outlook

Recently reported FY21 Gross Domestic Product (GDP) figures highlighted growth of 4.9% annualized, slightly ahead of SARB estimates of 4.8%. The FY20 GDP figure was also revised higher to -6.4% from -7% originally.

GDP is currently estimated at 1.7% in FY22, 1.8% in FY23 & 2.0% in FY24.

The rebound seen in FY21 from the pandemic riddled FY20 is expected to fade in FY22. Of concern is that the size of the South African economy remains smaller than it was pre pandemic (2019) and will remain so in coming years unless growth can be stimulated significantly higher than what is currently forecast.

The Rand

The long-term uptrend for the USD/ZAR has been broken, while the short to medium term trend for the currency pair is down.

The suggestion that the USD/ZAR is also currently oversold creates some ambiguity to the price action.

At the moment the price is testing support at R14.80/$. A break of this level would suggest R14.65/$ as the next downside support target from the move.

Traders looking to the long side on the currency pair might hope for a bullish price reversal out of oversold territory and before reaching the R14.65/$ level to target a rebound towards R15.20/$. The price would need to trade above this level to reinstill some confidence in a renewed uptrend.

Alternatively, if the R14.65/$ level does not hold, R14.40/$ becomes a further downside target for the currency pair.