South African Rand: Inflation relief and fiscal progress – Commerzbank

Commerzbank’s Volkmar Baur notes that softer South African inflation reduces the likelihood of further SARB hikes and supports higher real rates, which is mildly positive for the Rand. A better-than-feared mid-year budget and proposed fiscal sustainability law underpin structural improvements, and the bank expects ZAR to face near-term challenges but regain ground next year.

Softer CPI and supportive budget

"South African prices rose by 0.4% month-on-month in September, slightly less than the Bloomberg consensus forecast of 0.5%. This pushed the annual inflation rate up to 4.5%, also below analysts’ expectations of 4.7%. This is good news, as it suggests that the South African Reserve Bank is unlikely to raise interest rates again in November. Lower inflation therefore translates into higher real interest rates, which should provide some support for the currency."

"Revenues are expected to come in higher this fiscal year than previously assumed, while the budget deficit is likely to be smaller. Slower economic growth is expected to result in a slightly higher debt ratio, but the trajectory continues to point downwards, which is encouraging."

"In addition, the Finance Minister presented a draft law on fiscal sustainability. While the proposed legislation does not envisage rigid numerical fiscal rules, it would require every government to set fiscally sustainable targets and report on progress towards achieving them. The aim is to strengthen transparency and accountability in the fiscal process by anchoring these principles more firmly in law. The proposal was received positively by the market"

"We expect the next few months to remain challenging for the ZAR. However, continued structural improvements, such as the proposed fiscal sustainability legislation, reinforce our view that the ZAR should regain ground next year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)