Rand price forecast: Inflation improves but SARB likely to keep rates in check

Key Takeaways:

1. Inflation in South Africa has decreased for two consecutive months and reached its lowest level in four months at 5.1% year on year
2. Despite the decrease in inflation, policymakers are unlikely to lower interest rates at the upcoming Monetary Policy Committee meeting
3. Markets are suggesting that the first rate cut in the monetary easing cycle will come in May this year
4. The news of decreasing inflation has had a positive impact on the local currency, the rand (ZAR), which has strengthened against the dollar
5. Food inflation in South Africa has improved but still remains high

South Africa’s inflation rate slows

Consumer Price Index (CPI) data from Statistics South Africa (Statssa) has shown local inflation to have now decreased for two consecutive months and reached its lowest level in four months at 5.1% year on year (in December 2023). Food inflation has improved but does still remain high.

This is significant as it brings the inflation rate closer to the South African Reserve Bank's target midpoint of the 3% to 6% range at 4.5%.

Interest rates likely to remain unchanged

Despite the decrease in inflation, policymakers appear unlikely to lower rates at the conclusion of Thursday’s (25 January) MonetaryPolicy Committee (MPC) meeting.

South African Reserve Bank (SARB) Governor Lesetja Kganyago recently emphasized that inflation levels need to align and sustain more closely with the midpoint of the targeted range before any policy adjustments are made. The target
Markets are currently suggesting that the first rate cut in the monetary easing cycle will come in May this year. The SARB decision is also likely to be influenced by the US rates cycle, following their lead to stem capital outflows and maintain some carry trade opportunity.

Positive impact on the local currency:

The news of decreasing inflation has had a positive effect on the rand (ZAR), which has strengthened against the dollar. While a notable move on the rand was seen after the CPI data release, renewed appreciation in the ZAR has also been catalysed by a softer dollar overnight as well as higher export commodity prices. Commodity prices have reacted well to new Chinese stimulus expectations and been supported by the move on the greenback.

The sustainability of short-term gains in the ZAR are however likely to be tested in what is a news heavy week. Traders still need to watch out for the SARB and European Central Bank’s (ECB) rates decisions, as well as US Advance GDP and PCE inflation out later this week.

USD/ZAR Technical view

The recent upside break of the R19.15/$ level has now moved to test the failure level at R18.90/$, guided in our previous note (Technical Tuesday). A close below R18.90/$ would confirm the failure of the upside break and suggest a possible move towards the R18.60/$ mark. In this scenario, a close above R19.15/$ might be used as a stop loss indication.