Firm rand to ease inflation pressure

The rand’s strength is expected to ease the pressure on inflation.

The Reserve Bank was cautious last month on the rand’s strength and said the currency remained sensitive to domestic and external factors “and the recent trends can be quickly reversed”.

Efficient Group economist Francois Stofberg said yesterday that the recent rand strength would have a positive effect on inflation.

“We import a lot of inflation. Inflation will not be as aggressive as previously anticipated,” he said.

In a note earlier this week, Stofberg said following UK’s vote in favour of an exit from the EU, foreign investors could no longer get decent returns on their investments in most of the developed world.

Yields on government bonds in the developed world were close to zero, “or even negative”.

As a result, the investors turned to emerging markets.

“This flow of capital continues to do much to appreciate the rand. All in all, I believe the recent appreciation in the rand has been overplayed, just like the depreciation was after December 2015.

In all likelihood the rand will lose some steam and stabilise at levels around R14 to the US dollar. From here we can expect the rand to depreciate on average by 5.5 percent annually, against the US dollar,” said Stofberg.

Ratings Commenting on the possibility of a ratings downgrade, Stofberg said yesterday that Finance Minister Pravin Gordhan did a lot to convince the ratings agencies and investors about South Africa’s commitment to fiscal discipline.

“The credit agencies have given us a breathing space. The credit agencies had given us two years to address our structural issues. That has not happened. So the risk of a downgrade is still there,” said Stofberg.

He said the “structural issues” included a bloated civil service, leading to increased fiscal spending and higher debt levels.

“The other issue relates to labour disputes and how they are handled, as well as the introduction of the national minimum wage,” he said.

NKC African Economics senior economist, Hanns Spangenberg said yesterday, notwithstanding the rand’s strength, food prices were still expected to peak in the third quarter of this year.

“That will still push overall (consumer price index). So inflation is still going to continue to rise,” said Spangenberg.

The Reserve Bank last month said inflation was still expected to accelerate further this year and was only expected to return to within the target range of 3 percent to 6 percent during the third quarter of next year.