Key Points:
- Following the last interest rate decision, it is worth taking stock of what all this might mean for the ZAR and domestic policy. The SARB, by its very nature, is likely to be more conservative than most central banks, and that will become more evident as the central banking community steadily reduces interest rates. However, exerting fiscal discipline will be the real key to unlocking the ZAR’s appreciative power.
- Conservative fiscal policy within an efficient government structure gives the monetary authorities room to pursue prudent interest rate policies without needing to offset the effects of administered prices and state-linked inefficiencies. SA is currently forced to run with higher interest rates than would ordinarily be needed because fiscal policy has been poor and because of rank maladministration within SOEs and government.
Baseline View:
SARB monetary policy is likely to be more conservative than was anticipated six months ago. A lot has changed. Trump has brought some uncertainty, and speculation is intensifying that the authorities will reduce the SARB’s inflation target. That implies that the SARB’s interest rate policy will be conservative. Over time, the ZAR’s attractiveness will improve, lending it greater resilience.
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