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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.
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About the author

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.
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