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The SA Daily 20 September 2018

SARB in focus

  • Yesterday’s lower than expected inflation print for August reflected the benign inflationary pressures within the SA economy and the low exchange-rate pass through, which builds a weak case for the SARB to hike interest rates.
  • We still believe that the SARB’s inflation forecasts today will remain the key to future interest rate hikes. An adjustment to the SARBs inflation forecasts in response to rand weakness should reflect an assessment of whether inflation expectations is expected to breach the SARB’s 3%-6% target band. As such, the SARB could react to the adjusted forecasts and maintain its inflation fighting credibility, by ensuring a sufficient real-repo rate over the medium-term.  
  • The money market is currently pricing in three 25 bps rate hikes over the next 12 months. We acknowledge the upside risk depending on 1) whether there is an increase in the BER-surveyed inflation expectations in Q3:18, and 2) how quickly the SARB expects the current rand overshoot to fade (given the impact that this will have on its inflation forecasts).
  • Since, we see a compression in the rand’s current overshoot, our inflation forecasts will still remain below the SARB’s upper target band of 6% by end-2019. This ultimately supports our view for steady interest rates over the next 12 months (see August inflation falls to 4.9%, of 19 September by Elna Moolman).

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