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South African Central Bank on a rand tightrope, Commerzbank says

The fragile South African economy puts the central bank ‘between a rock and a hard place.’

It hasn’t been a good time for the rand since the last meeting of the South African Reserve Bank in May, and there’s not much the central bank can do to cushion the currency in months to come, according to Commerzbank AG.

The rand had its worst month in more than two years in June as America and China exchanged tariff blows at a time when the prospect of rising US rates also weighed on emerging-market assets. The weaker currency and higher oil prices are adding upside risks to inflation in Africa’s most-industrialised economy.

The situation seems ripe, then, for a rate increase, but the fragile South African economy puts its central bank “between a rock and a hard place,” Commerzbank economist Elisabeth Andreae said in a note to clients dated July 12. Output contracted 2.2% in the first quarter, and the economy is forecast to expand just 1.6% this year.

“The prospect of rate hikes can dampen the depreciation pressure while higher financing costs would put additional pressure on the economy,” Andreae said. “Conversely, disappointed rate hike expectations can increase downside pressure for the rand. The Sarb’s communication on timing and the extent of future rate steps is thus turning into a tightrope walk.”

Forward-rate agreements, used to speculate on interest rates, are pricing in 22 basis points of rate increases this year, though they predict the Sarb will stay put at its meeting on July 19. The tone of the statement will be crucial, Andreae said.

“Should the Sarb seem more hawkish than expected this might support the rand at least short term,” she said.

Source: Bloomberg

The rand gained 1% to 13.4145 per dollar by 2:04 pm in Johannesburg, bringing its advance this month to 2.2% after a 7.5% plunge in June.

© 2018 Bloomberg

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