Commerzbank’s Volkmar Baur sees it as almost certain that South African Reserve Bank (SARB) will hike 25 bps to 7.25%, reversing a third of its 2024–25 easing after inflation re-accelerated on fuel and core components above target. He argues future South African Rand (ZAR) performance hinges on how resolute SARB remains, with a continued hawkish tone and focus on the inflation target likely best for the Rand.

Hawkish SARB supports ZAR outlook

"If there were any doubts remaining, they should have been dispelled by the inflation figure released yesterday. It seems certain that the South African Reserve Bank (SARB) will raise interest rates again today by 25 basis points to 7.25%."

"This would mean that one-third of the rate-cut cycle from 2024–25 -when the policy rate was lowered from 8.25% to 6.75% - would have been reversed after just two meetings. However, the SARB is likely justified in feeling compelled to take this step."

"The conflict in Iran and rising fossil fuel prices have halted and even reversed the decline in inflation in the country. At an annual rate of 5%, prices rose in June at their fastest pace in two years. Gasoline prices, which have risen by about 35% compared to the previous year, are the main driver of this trend."

"However, this development can no longer be attributed solely to energy costs. The core rate - excluding energy and food - also rose in June at an annual rate of 4.1%, the fastest pace in nearly two years. More importantly, it exceeded the upper end of the central bank’s inflation target range (3% ± 1)."

"For the ZAR, the key factor will be how resolute the SARB continues to be. At its last meeting, the SARB announced that, if necessary, it would raise interest rates three more times to defend the inflation target."

"Now that the geopolitical situation has improved in the meantime, it is likely more difficult than before to assess future developments. A continued hawkish tone, keeping the inflation target at the center of the central bank’s efforts, would therefore probably be best for the ZAR."

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