Societe Generale strategists expect a 25bp rate hike in South Africa after a sharp June inflation surprise, with Headline Consumer Price Index (CPI) at 5.0% and core at 4.1%. They highlight broadening price pressures beyond energy, rising medium-term inflation expectations and concerns over second-round effects. They note that a hawkish South African Reserve Bank (SARB) stance could see USD/ZAR break below its 50-day moving average support.

Inflation shock supports SARB tightening

"In EM, we pencil +25p today in South Africa following the ugly June inflation print yesterday. Headline CPI accelerated to 5.0% yoy and core inflation rose to 4.1%, suggesting that price pressures are no longer confined to energy."

"This also marks the fourth consecutive monthly increase in headline inflation from the 3% low in February (SARB target). Medium-term inflation expectations have also drifted higher. Stronger fuel prices were accompanied by upside surprises for rent, healthcare, hotels and restaurants."

"This reinforced concerns about second-round effects and inflation persistence. Rising inflation expectations and the expansion of the Gulf war strengthened the case for further tightening and negate Governor Kganyago's recent suggestion that the inflation shock could prove temporary. "

"Markets will also focus on the assessment of inflation expectations and whether policymakers signal that additional tightening may be required in September."

"A hawkish hike could cause 50dma support to give way in USD/ZAR (16.4042)."

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