Rand resilience after SARB rate hike to be tested into Fed meeting next week
The rand has held up well against the dollar following a larger than expected rate hike by the SARB, although the long term trend still favours weakening.
SARB raises rates by more than expected
The South African Reserve Bank (SARB) has raised local lending rates by 75 basis points (0.75%) at the conclusion of its Monetary Policy Committee (MPC) meeting on Thursday 21 July 2022. The repurchase rate (repo) has now moved from 4.75% to 5.5% while the prime lending rate has moved to 9% from 8.25% previously.
The rate hike was larger than the 50 basis point consensus estimate, although follows two months (May and June) of inflation breaching the 6% SARB ceiling. Consumer Price Index (CPI) data for June had shown energy and food price pressures pushing inflation to 7.4%, its highest level in 13 years.
Inflation outlook
Risks to inflation and in turn revisions to forecasts from the SARB have moved higher. The central bank now expects CPI to average at 6.5% (previously 5.9%) in 2022, and at 5.7% in 2023 (previously 5%).
Growth outlook
Better than expected Gross Domestic Product (GDP) data for the first quarter has seen the SARB raise its forecast for economic growth in 2022 to 2% (previously 1.7%). Q2 2022 is however expected to show a 1.1% economic contraction as a result of extensive loadshedding and the Kwazulu-Natal (KZN) floods. Growth for 2023 and 2024 have however been revised lower to 1.3% (from 1.9%) and 1.5% (from 1.9%) respectively.
The rand
Following the larger than expected rate hike we have seen the rand showing some resilience against the dollar, with near term (2yr) bond prices falling and yields rising. The sustainability of Thursday’s rand resilience is however likely to be tested as we move closer towards the Federal Reserve interest rate decision on the 27th of July 2022.
USD/ZAR – Technical view
The USD/ZAR has moved into a short term triangle consolidation within the longer term uptrend still prevalent. The triangle consolidation suggests a continuation of the preceding uptrend to follow. It is however prudent to wait for a price breakout before committing.
A close above triangle resistance would consider an upside break with channel resistance at 17.65 the next upside target. Should the price instead move to break support of the triangle, we would still look for long entry on a reversal at one of the lower support levels labelled on the chart above.
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