Rand Sell-Off Prevents SARB From Easing

Looking at the South African economy, where the economic slowdown is gaining momentum and clearly warrants further monetary easing, the ongoing sharp sell-off in rand on the back of risk-off sentiment in the global markets is preventing the South African central bank from cutting interest rates at this time. Hence, in line with consensus, we expect the SARB's Monetary Policy Council to decide in favour of unchanged interest rates next week, maintaining the key policy rate at 5.0%.

Looking ahead, we still expect one 50bp rate cut, which could come as early as January’s MPC meeting. However, this is highly dependent on rand development and inflation. We must stress that the room to manoeuvre for the South African central bank is limited given that upside inflationary risks have increased. Even though inflation remains within the inflation target of 3-6% at this time, higher food and fuel prices as well as the weak rand clearly represent upside risks to inflation going forward. The SARB Governor recently warned that the market should not take further monetary easing for granted given that ‘inflation issues seem to be coming through’. Furthermore, the ongoing sell-off in rand, on the back of the current elevated risk aversion, and increasing socioeconomic problems represent considerable upside inflationary risk.

Despite the sluggish economic activity and social problems on the back of domestic labour unrest, we think the current rand sell-off is somewhat overdone. We expect the current risk-off environment to be temporary (although it is likely to continue throughout December) and we look for an improvement in risk appetite early in 2013. In our view, it is likely that we will see the rand to regain some of its losses. However, we believe this will be only moderate and we still remain bearish on the rand on a 12-month horizon due to continued fundamental overvaluation (our forecast for 12M USD/ZAR is 9.10).

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