ZAR setback likely to be temporary – Commerzbank

The South African rand lost around one percent against the US dollar yesterday. However, the reason for this was actually a positive one. Inflation fell to an annual rate of 3.8%, as expected by most analysts, after having stood at 4.4% in August, Commerzbank’s FX analyst Volkmar Baur notes.

Positive real interest rate to continue to support the currency

“This naturally raises hopes on the market that, after the first interest rate cut of 25 basis points to 8.0% at the end of September, the South African Reserve Bank (SARB) could shift up a gear in November to cut the key interest rate by 50 basis points. However, I believe this assessment is premature.”

“Although it is true that inflationary pressure in South Africa has eased significantly in recent months, two aspects in particular have been decisive for this. On the one hand, the oil price has fallen significantly in recent weeks. The fall in petrol prices is therefore also reflected in the inflation rate. If this effect is factored out, the rate of price increases in September remained unchanged from the previous month at 4.5%.”

“In addition, the inflation figures for October will be released before the November meeting - which somewhat diminishes the importance of the figures published yesterday. I therefore continue to assume that the central bank will proceed cautiously and cut interest rates again by only 25 basis points. In combination with lower inflation, this results in a still clearly positive real interest rate, which should continue to support the currency.”