Commerzbank's Volkmar Baur anticipates that the South African Reserve Bank (SARB) will implement a fully priced 25 basis point interest rate hike, raising the policy rate to 7.00% at its upcoming monetary policy meeting. This expectation is based on recent inflation data, with the annual rate rising to 4% in April after remaining within the new 2-4% inflation target range for 19 months. The increase in gasoline prices suggests that inflation likely continued to rise in May as well [1].
Market participants are currently discounting approximately three rate hikes by the SARB in the coming months, which would bring the policy rate up to 7.50%. The first hike from 6.75% to 7% is already fully priced in, and as a result, the initial reaction of the South African Rand (ZAR) is expected to be muted [1].
SARB Governor Lesetja Kganyago, in a speech earlier this month, emphasized the importance of preparing for uncertainty rather than attempting to predict outcomes. His remarks were interpreted as advocating for a cautious approach in uncertain times. The central bank's commitment to its new 3% inflation target, officially introduced in November, is seen as a key factor in its tightening policy stance [1].
Commerzbank argues that the anticipated interest rate hike is structurally supportive for the South African Rand, as it signals the SARB's determination to defend its inflation target and maintain credibility in the face of rising price pressures [1].
CONCLUSION
The South African Reserve Bank is expected to raise interest rates in response to rising inflation, with markets already pricing in further hikes. This move is viewed as supportive for the Rand and reinforces the central bank's commitment to its new inflation target.