Rand rallies on optimism rate hike isn’t just a one-off

South Africa’s rand rose after the nation’s central bank boosted its main interest rate for the first time since 2016 and said its model signals four increases by the end of 2020.

“Given the tone of the speech the probability for more tightening is higher than I thought earlier,” said Guillaume Tresca, a senior emerging-market strategist at Credit Agricole SA.

“The SARB will be really data dependent, driven by the rand movement.”

The currency extended its advance to as much as 1.3% against the dollar after the Monetary Policy Committee voted to increase the benchmark repurchase rate to 6.75% from 6.5%. The yield on the government’s rand-denominated bonds due 2026 fell eight basis points to 8.96%.

The central bank’s decision to increase its benchmark rate on Thursday is especially notable because unlike policy makers across emerging markets, South Africa’s regulator has resisted pressure to boost the rand’s appeal with higher real rates as a rout swept across developing nations. Policy makers in Mexico, Indonesia and the Philippines lifted rates last week.

“Despite the muted economic activity and the inflation still in the target band range, the SARB is worried by the second-round effects and a de-anchoring of inflation expectations,” Tresca said.

Read: South Africa hikes interest rates

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Rand rallies on optimism rate hike isn’t just a one-off