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South African rand (ZAR): What can break its resilience?

11:56, 25 March 2022

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Transvaal Lions with cub drinking water at center, male lion head. Portrait from South Africa 50 Rand 1992 Banknotes.
The South African lion on the ZAR50 banknote is a symbol of strength and resilience – but will global uncertainties cause it to depreciate? – Photo: Shutterstock

The South African rand (ZAR) continued to remain strong versus the US dollar with the country’s central bank raising interest rates faced with rising inflationary pressures. 

The South African Reserve Bank (SARB) raised interest rates by 25 basis points (bps) on Thursday 24 March, sending the rand to its highest level in five months. The currency did lose some ground on Friday (March 25) as the USD/ZAR exchange rate climbed by 0.35% to 14.56. 

Although the SARB revised its global economic growth forecasts lower for 2022 and 2023, it expects the domestic economy to grow at 2% in 2022, faster than the 1.7% it had forecast in January.

Further, the central bank has also justified its decision to hike rates because it sees more risks for inflation to rise. 

Inflation seen to be rising

Lesetja Kganyago, governor of the SARB, said in a statement: “Global producer and food-price inflation continued to surprise higher in recent months and could do so again, particularly if the war in Ukraine persists into the growing season.

“Oil prices increased strongly through 2021 and are up again sharply year-to-date, propelled higher also by the war and economic sanctions.”

Experts also see the risks of higher inflation as the biggest concern for the domestic economy. 

Isaac Matshego, economist at Nedbank, commented in a note: “The upside risks to inflation are a significant concern.

“A higher pass-through of elevated fuel and grain prices to core prices and faster paces of interest rates normalisation by the major central banks would likely prompt the SARB to hike at a faster rate than currently anticipated.”

More rate hikes on the anvil

With inflationary pressures growing, experts believe the SARB will keep raising rates in the coming meetings. 

“The tenor of the MPC [Monetary Policy Committee] statement also strikes a hawkish signal, with big concern about upside inflation risks…We maintain our view that the MPC will hike by 25bps at each of the next four MPC meetings,” Absa Bank said in a note

Although the rand has shown strong resilience versus the US dollar despite the uncertainties that the war in Ukraine has brought, the SARB remains conservative regarding its own expectations of the rand’s value.

For its forecasts, the SARB used a USD/ZAR exchange rate of 15.41 – 3% less than the average of 14.77 over the past two weeks. 

Rand resilience may break

According to Rand Merchant Bank, the ZAR has gained 10% since the beginning of the year against the dollar. However, its resilience may break soon as global economic uncertainties rise. 

“What is clear is that policymakers are now facing a very different environment compared to the start of the year. A number of separate shocks are mounting on each other, elevating uncertainties and creating the perfect storm,” said Siobhan Redford, South Africa economist at Rand Merchant Bank. 

In a note, Nicky Weimar, chief economist at Nedbank said: “The rand’s recent resilience will be tested in the months ahead. Global risk appetites will probably remain choppy as the war drags on, global inflation rises, and the US raises interest rates further and reduces its balance sheet.”

She added: “Elevated metal prices will offer some counter, but the rand is still expected to depreciate moderately during the remainder of 2022.”

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