SARB lends support to ZAR by hiking

Key points

• In line with market expectations, the SARB hiked rates 25bp, taking the repo rate up to 7.00%. By all accounts, the interest rate futures markets suggest the SARB could still hike twice more to take the repo rate to 7.50%. That is unfortunate, given the way the year started, but the SARB has a lot to consider and will need to balance any short-term pain with the benefits of fostering longer-term price stability.
• The decision to hike was deemed prudent and sends a signal to the market that the SARB is taking its 3% inflation mandate seriously and will do what it can to responsibly reduce inflationary pressures without cratering the economy. A gradual, but steady tightening for as long as the ZAR price of oil continues to boost inflation is both inevitable and responsible.
• Whether it is enough to shield the ZAR from negative speculation remains to be seen. Inflation, after all, has risen far more rapidly than the rise in interest rates, implying that real rates have fallen. How far they fall will depend on how quickly energy markets normalise. Low positive real rates typically coincide with weaker carry attractiveness, and that might well translate into a more vulnerable ZAR.

BASELINE VIEW:

When one considers the degree of ZAR appreciation the ZAR has achieved in the past 12 months, and combines that with rapidly rising inflation, erosion of SA’s terms of trade, which feed into the deterioration in the ZAR’s carry attractiveness, the only conclusion to be drawn is that the ZAR is vulnerable to a sell-off.

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