Skip to main content
SA rands

Rand poised for further strength if inflation target lowered

Markets are anticipating the announcement of a new inflation target, with the range currently 3-6% y/y and the midpoint of 4.5% y/y.

Receive Focus insights straight to your inbox

* indicates required field.
Enter your name here *

This information is required

Minimun Characters 1

This is a required field.

Enter your surname here *

This information is required

Minimun Characters 1

This is a required field.

Enter your email address here *

This information is required

Minimun Characters 1

Please enter a valid email address

Enter other service here

This information is required

Minimun Characters 1

YYYY *

This information is required

Minimun Characters 1

This is a required field

Please complete all required fields before sending.

Thank you

We look forward to sharing out of the ordinary insights with you

Focus newsletter promo

Sign up to the Focus newsletter for regular insights from Investec experts.

* indicates required field.
Enter your name here *

This information is required

Minimun Characters 1

This is a required field.

Enter your surname here *

This information is required

Minimun Characters 1

This is a required field.

Enter your email address here *

This information is required

Minimun Characters 1

Please enter a valid email address

Enter other service here

This information is required

Minimun Characters 1

YYYY *

This information is required

Minimun Characters 1

This is a required field

Please complete all required fields before sending.

Thank you

We look forward to sharing out of the ordinary insights with you

 

The rand continues to attempt to break through the R18.00/USD mark, a major resistance level, reaching R17.99/USD temporarily on Friday, then rebounding back above R18.00/USD, and at R18.01/USD today, ahead of the budget.

Markets are anticipating the announcement of a new inflation target, with the range currently 3-6% y/y and the midpoint of 4.5% y/y. National Treasury is likely to prefer a gradual descent, as opposed to the SARB’s preference of close to 3.0% y/y.

National Treasury sets the inflation target, and the Reserve Bank is mandated to achieve it, with National Treasury in charge of deciding what the range and or target point will be, and having said a change is imminent.

However, National Treasury has also warned in the past that “you don’t get there (a lower inflation target) in a manner which is painless”, “What is clear is that if we revise the target, the target can only be revised lower.” “But … to get there is tough.”

Finance Minister Godongwana has previously asked National Treasury and the Reserve Bank to determine the full impact on consumers and the economy first before any changes are made to the inflation target.

The announcement could come as early as this week, on Wednesday, with National Treasury having said “South Africa’s inflation target is out of sync”. A modest revision to 3-5% y/y with a midpoint would probably be preferable for National Treasury.

This is in contrast to the Reserve Bank’s previously stated choice of closer to South Africa’s key trading partner’s inflation targets of 2.0% y/y (US, EU, China, UK), but first moving to 3.0% y/y before the drop to 2.0% y/y.

A compromise of a new target range of 5-2% y/y is possible, with a midpoint then of 3.5% y/y. CPI inflation is already below this, at 2.7% y/y, and likely to be below 3.0% y/y for Q2.25. However, base effects in Q3.25 will push inflation above 3.5% y/y.

A new target midpoint of 3.5% y/y would likely mean no further interest rate cuts for this year. The rand would likely strengthen further towards R17.50/USD as the US cuts. Currently two -25bp US interest rate cuts are expected in H2.25.

More detail

For more detailed information, read the full report

About the author

Annabel Bishop

Annabel Bishop

Chief Economist of Investec Ltd

Annabel holds an MCom Cum Laude (Economics and econometrics) and has worked in the macroeconomic, risk, financial market and econometric fields, among others, for around 25 years. Working in the economic field at Investec, Annabel heads up a team, which focusses on the macroeconomic, financial market and global impact on the domestic environment. She authors a wide range of in-house and external articles published both abroad and in South Africa.


PREVIOUS RAND UPDATE:

Rand sees less volatility recently PDF 1.65 MB
  • Disclaimer

    The information and materials presented in this report are provided to you for information purposes only and are not to be considered as an offer or solicitation of an offer to sell, buy or subscribe to any financial instruments. This report is intended for use by professional and business investors only. This report may not be reproduced in whole or in part or otherwise, without the consent of Investec.

    The information and opinions expressed in this report have been compiled from sources believed to be reliable, but neither Investec, nor any of its directors, officers, or employees accepts liability for any loss arising from the use hereof or makes any representation as to its accuracy and completeness.

     

    Investec, and any company or individual connected to it including its directors and employees may to the extent permitted by law, have a position or interest in any investment or service recommended in this report. Investec may, to the extent permitted by law, act upon or use the information or opinions presented herein, or research or analysis on which they are based before the material is published.

     

    Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by Investec and are subject to change.

     

    Investec is not agreeing to nor required to update research commentary and data. Therefore, information may not reflect events occurring after the date of publication. The value of any securities or financial instruments mentioned in this report can fall as well as rise. Foreign currency denominated securities and financial instruments are subject to fluctuations in exchange rates that may have a positive or adverse effect on the value, price or income of such securities or financial instruments. Certain transactions, including those involving futures and options, can give rise to substantial risk and are not suitable for all investors.

     

    Investec may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them.

     

    This report is disseminated in South Africa by Investec Bank Limited, a firm regulated by the South African Reserve Bank.

     

    To our readers in South Africa this does not constitute and is not intended to constitute financial product advice for the purposes of the Financial Advisory and Intermediary Services Act.

     

    This report is disseminated in Switzerland by Investec Bank (Switzerland) AG.

     

    To our readers in Australia this does not constitute and is not intended to constitute financial product advice for the purposes of the Corporations Act.

     

    To our readers in the United Kingdom: This report has been issued and approved by Investec Bank (UK) Limited, a firm regulated by the Financial Conduct  Authority and is not for distribution in the United Kingdom to private customers as defined by the rules of the Financial Conduct  Authority.

     

    To our readers in the Republic of Ireland, this report is issued in the Republic of Ireland by Investec Bank (UK) Limited (Irish Branch), a firm regulated by the Central Bank of Ireland.

     

    This report is not intended for use or distribution in the United States or for use by any citizen or  resident of the United States.