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Rand Gains after South African Reserve Bank Interest Rate Decision and Ramaphosa's Commitment to Economic Stimulus

Johannesburg, South Africa, Image © Adobe Stock

- ZAR rises as USD falls and Ramaphosa talks economic stimulus.

- SARB holds rates at 6.5% in close-call decision, may still hike later.

- Rising oil price and weaker ZAR place inflation outlook under spotlight.

The Rand rose Thursday as traders responded to a hawkish interest rate statement from the South African Reserve Bank (SARB) and the government's surprise announcement of an economic stimulus package to be unveiled Friday.

South Africa's central bank held its interest rate steady at 6.5% Thursday, citing a deteriorating inflation outlook that is not yet sufficiently severe in order to justify an interest rate rise.

"The MPC has decided to keep the repurchase rate unchanged at 6.5% per annum. Four members preferred an unchanged stance and three members preferred a 25 basis points increase," the SARB says in it's statement

The SARB tweaked many of its inflation forecasts higher for coming years, although not by much, citing a weaker currency and rising oil prices.

The consumer price index is now expected to peak at 5.9% in the second-quarter of 2019, up from 5.7% previously and within an inch of the 3% to 6% target band's upper limit.

Policymakers cut their forecast for 2018 GDP growth from 1.2% to 0.7% but held projections for 2019 and 2020 steady at 1.9% and 2% respectively. 

Governor Lesetja Kganyago said risks to the inflation outlook are on upside but at the same time, risks to the economic growth outlook are to the downside. 

The latter more than anything may have influenced the decision to hold interest rates steady because Kganyago previously said the SARB would act if inflation looks to be deviating significantly away from the 4.5% midpoint of the target range. 

"The Committee continues to assess the stance of monetary policy to be accommodative. However, the MPC remains concerned about the deteriorating inflation outlook, driven mainly by multiple supply-side factors. The approach of the Committee continues to be to look through the first-round effects and focus on the possible second-round effects. With risks and uncertainties at higher levels, the MPC will continue to be vigilant and will not hesitate to act should it become necessary," the Bank also says. 

Thursday's decision to hold was widely anticipated by the market, with only three out of 18 analysts polled by Bloomberg anticipating a rate hike, but most see an increase coming either later on in 2018 or once into next year.

"The retracement of USD/ZAR to 14.70 coupled with Brazil and Hungary’s unchanged policy stances have lessened the probability of a rate hike today. But, external risks to the rand remain prevalent, which means that the SARB could still lift rates by 25bp before the end of the year to safeguard the value of the currency," says Nema Ramkhelawan-Bhana, an economist at Rand Merchant Bank, in a note before the announcement.

The USD/ZAR rate was quoted 1.31% lower at 14.45 during the noon session but is up 17% so far in 2018, while the Pound-to-Rand rate was 0.30% lower at 19.18 but has risen 15.1% this year.

Rand price action came as the U.S. Dollar declined for a third consecutive session, providing breathing space to emerging market currencies.

It also follows President Cyril Ramaphosa's announcement Thursday that he will soon unveil a package of measures designed to stimulate South Africa's recession-stricken economy. 

"With concerns over SA’s economic performance high, the President is set to announce a stimulus package to spur economic growth, although reservations exist on the additional pressure that this may put on government finances. The package is likely to consist of some reprioritisation in spending (to be fleshed out in the MTBPS), an easing in red tape and renewal of previous efforts at reforms to remove blockages, increase job creation and quicken GDP growth," says Annabel Bishop, chief economist at Investec Bank.

The SARB cut its interest rate from 6.75% back in February and is seen as reluctant to tighten monetary policy given South Africa's economy slipped into recession during the second quarter. 

However, a double-digit increase in the price of oil this year, as well as a similarly sized decline in the Rand, have had economists fearing a sudden increase in inflation that forces the central bank into action.

Thursday's interest rate decision follows closely behind the latest inflation data, which revealed a surprise fall in South African consumer price pressures during August.

South African inflation rose at an annualised pace of 4.9% during August, down from 5.1% back in July, when markets had looked for an increase to 5.2%. 

Core inflation also declined, from 4.3% in July to 4.2%. But this decline is unlikely to last, or so goes the unanimous view of the analyst community.

Statistics South Africa data shows alcohol, tobacco and transport costs made a lesser contribution to inflation than they did back in July, accounting for much of the decline in the consumer price index, although there wasn't a single category of goods in which price pressures actually increased during the recent month.

South Africa's economy contracted by -0.7% during the three months to the end of June, leaving it in recession, after having shrank by -2.6% in the opening quarter. 

As bad as this might be for South Africans, the already weak state of the economy is the one and only significant factor that could keep the Reserve Bank from hiking interest rates.

This is because lesser demand associated with a slower economy may offset some of the inflation pressures stemming from the rising price of oil and falling Rand.

A strong U.S. Dollar has driven emerging market currencies into the ground this year, raising the cost of imported goods and pushing up consumer price gauges in all effected economies. The only way for these countries to counter that trend themselves has been for their central banks to raise rates. 

Changes in rates, or hints of them being in the cards, are normally only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

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