SARB may hike interest rate if weak rand boosts inflation

The rand’s plunge to the weakest in almost seven months against the dollar may push up South African inflation and necessitate interest-rate increases, central bank Deputy Governor Kuben Naidoo said.

While the SA Reserve Bank (SARB) doesn’t target a specific level of the rand, it responds to second-round effects on prices from currency weakness, Naidoo said in an interview with Bloomberg TV in Sintra, Portugal, on Tuesday.

“If we do think there is a risk of second-round effects, we will have to act,” he said. Inflation was 4.5% in April, in the middle of the central bank’s target range. “But if it rises and if it’s forecast for rise, we will have to act.”

The Reserve Bank held its key rate at 6.5% last month after cutting in July and March, citing the cost of oil and wage increases as risks to the outlook for the pace of price increases. The central bank forecast inflation will stay in its 3% to 6% target range until at least the end of 2020. A government report on Wednesday will probably show the rate increased to 4.6% in May, according to the median estimate in a Bloomberg survey.

Forward-rate agreements starting in six months, used to speculate on borrowing costs, show traders are now pricing in a 66% chance of a 50-basis point rate increase before the end of the year.

Inflation Expectations

After strengthening to a three-year high against the dollar following Cyril Ramaphosa’s ascent to the presidency, the rand has wiped out all those gains and at 13.7170 per dollar at 17:47 p.m. on Tuesday, it’s back at levels it was at in early December. That adds to the risks to price pressure and inflation expectations, as measured by the five-year breakeven rate, are now at the highest level in seven months.

The effect of the rand on prices will depend on how long it remains weak, Naidoo said.

“If you have much weaker currency persisting for a long time, it will have a much greater likelihood of causing inflation,” he said. “If the currency is back to 12.50 in a month’s time, it will have a much lower chance of causing inflation.”