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Temporary fall in South Africa’s inflation figures unlikely to trigger 2024 rate cuts

17 Apr 2024 12:12|Bartosz Sawicki

South Africa’s March inflation data came in marginally below the market expectations. Consumer prices jumped 0.8 pct m/m, only a tad down from 1.0 pct in February, when administrative price changes contributed to the highest monthly inflation rate since March 2023. The annual CPI rate dropped to 5.3 pct from 5.6 pct previously.

The yearly price gains are set to hover in the upper part of the 3-6 pct target for the rest of the year. Persistent price pressures support the SARB's hawkish stance. South Africa, along with Poland, is one of the few major emerging market economies that will not see a rate cut before the end of the year. With no rate cuts currently priced in, the rand, which has depreciated almost 4 percent against the rebounding US dollar in year-to-date terms, will remain under the influence of other factors.

In the near term, apart from unstable global risk sentiment, the rand will be driven predominantly by domestic politics. The latest polls ahead of the 29 May vote show that the ruling ANC party's support is below the parliamentary majority threshold. If the ANC is forced to seek coalition partners on the far left of the political spectrum, this would be negative for the ZAR. Firstly, uncertainty and potential government instability would translate into higher risk premiums. Secondly, such an outcome would be perceived as market-unfriendly due to diminishing prospects of much-needed fiscal consolidation. In the next two years, the budget deficit, which will amount to 6.0% of GDP in 2023, is expected to remain above 5%.

The South African rand should remain volatile and fragile in the run-up to the elections. The USD/ZAR exchange rate, which spiked above the 19.00 mark this week, might soon test 20.0 if the current EM adverse market sentiment fails to stabilize. The SARB will remain hawkish and keep its interest rate at 8.25 pct. Moreover, the most recent spike in metal prices improves relative terms of trade. It should, at least partially, offset the negative impact of soaring oil prices on the fragile current account situation. Nonetheless, fintech Conotoxia sees no real respite for the rand on the cards in 2024. Political uncertainty, infrastructural woes and weak fiscal position should prevent the USD/ZAR rate from a sustainable decline below 19.00.

17 Apr 2024 12:12|Bartosz Sawicki

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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