Commerzbank’s Volkmar Baur says the South African Reserve Bank’s (SARB) decision to keep its policy rate unchanged at 7% came as a negative surprise, particularly after June inflation rose and Brent crude moved above USD 100 per barrel. The less hawkish policy guidance triggered a sharp sell-off in the rand, which lost more than 2% against the US Dollar, while further weakness remains a risk.

No hike shocks market and hits rand

"That came as a (negative) surprise. The consensus (and we) had actually expected the South African Reserve Bank to raise the policy rate. However, that did not happen yesterday, and the repurchase rate remained unchanged at 7%."

"On a day when the price of Brent crude oil rose above USD 100 per barrel - which should have significantly heightened inflation concerns in South Africa - the decision to keep the key interest rate unchanged felt out of place. It was as if they hadn’t noticed the roughly 10% rise in oil prices over the last two days alone."

"And the statement from the meeting also sounded rather out of touch. While the last meeting had mentioned three further rate hikes in an adverse scenario, there was no mention of that this time. In that scenario, only one more rate hike would be needed to bring inflation back down to 3% in the medium term. Base case we were told, is no more hike at all. Furthermore, the statement that the inflation picture had improved since the last meeting is surprising."

"All in all, there was a slight sense that the central bank meeting, the decision, and the rationale were somewhat out of step with current conditions. Fourteen days ago, with oil prices below USD 80 per barrel, the market would likely have accepted the decision and the rationale. Yesterday, however, it caused the rand to lose more than 2% against the US dollar - its weakest day since March 3, shortly after the start of the Iran conflict. There is reason to fear, however, that this may not be the end of it."

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