South African Rand: What do easing inflation and fiscal progress signal? – Commerzbank

The Rand receives modest support from softer South African inflation, which makes further SARB rate hikes less likely and supports higher real interest rates, according to Commerzbank’s Volkmar Baur. Structural improvements are underpinned by a mid-year budget that was better than feared and proposed fiscal sustainability legislation. While the bank sees challenges for ZAR in the near term, it expects the currency to recover ground next year.

Can softer CPI and a supportive budget help the Rand?

"South African prices rose by 0.4% month-on-month in September, slightly less than the Bloomberg consensus forecast of 0.5%. This pushed the annual inflation rate up to 4.5%, also below analysts’ expectations of 4.7%. This is good news, as it suggests that the South African Reserve Bank is unlikely to raise interest rates again in November. Lower inflation therefore translates into higher real interest rates, which should provide some support for the currency."

"Revenues are expected to come in higher this fiscal year than previously assumed, while the budget deficit is likely to be smaller. Slower economic growth is expected to result in a slightly higher debt ratio, but the trajectory continues to point downwards, which is encouraging."

"In addition, the Finance Minister presented a draft law on fiscal sustainability. While the proposed legislation does not envisage rigid numerical fiscal rules, it would require every government to set fiscally sustainable targets and report on progress towards achieving them. The aim is to strengthen transparency and accountability in the fiscal process by anchoring these principles more firmly in law. The proposal was received positively by the market"

"We expect the next few months to remain challenging for the ZAR. However, continued structural improvements, such as the proposed fiscal sustainability legislation, reinforce our view that the ZAR should regain ground next year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)