Commerzbank’s Volkmar Baur expects the South African Reserve Bank (SARB) to deliver a fully priced 25 bps hike to 7.00%, with markets discounting roughly three hikes to 7.50% in coming months. He argues that tighter policy, in response to rising inflation and higher gasoline prices, is structurally supportive for the South African Rand (ZAR) as SARB signals commitment to its new 3% inflation target.

SARB tightening seen as supportive

"When the Reserve Bank of South Africa (SARB) meets today for its monetary policy meeting, the outcome is likely to be an interest rate hike. Inflation rose too sharply in April."

"After remaining within the new 2-4% inflation target for 19 months, the annual rate rose to 4% in April. And inflation is likely to have risen further in May - at least that is what the higher gasoline prices suggest."

"In a speech earlier this month, SARB Governor Lesetja Kganyago made clear how he intends to deal with the current uncertainty: It is more effective to prepare than predict. And the rest of his speech also reads like a plea to err on the side of caution in uncertain times."

"The market is pricing in roughly three rate hikes by the SARB over the coming months, which would bring the policy rate up to 7.5%. A first hike from 6.75% to 7% at today’s meeting is also fully priced in. The initial reaction of the ZAR is therefore likely to be muted."

"Nevertheless, we believe that an interest rate hike is structurally the right signal for the South African rand and demonstrates that the central bank is willing to take its new inflation target of 3% (+/1%) - which was only officially introduced in November - seriously and defend it."

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