SA Reserve Bank on a rand tightrope - Commerzbank

It hasn’t been a good time for the rand since the last meeting of the SA Reserve Bank (SARB) 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 SA.

The situation seems ripe, then, for a rate increase, but the fragile SA economy puts SARB "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.

The rand gained 1% to 13.4145/% by 14:00, bringing its advance this month to 2.2% after a 7.5% plunge in June.

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