The rand strengthened considerably against the major currencies in afternoon trade on Wednesday, after inflation data surprised the market.
Consumer price inflation increased by 4.0% year-on-year as at the end of July 2019, which was down from the 4.5% in June.
“This now marks the eighth consecutive month that year-on-year inflation was at or below the midpoint of the target band and the twenty-eighth consecutive month that inflation is below the top end of the target band,” said Luigi Marinus, portfolio manager at PPS Investments.
The median estimate of 15 economists in a Bloomberg survey was 4.3%.
The data buoyed the rand which had endured a slump of as much as 10% since the beginning of August.
Shortly after 15h00, the local unit traded at the following levels against the major currencies, namely the dollar, the British pound, and the euro:
- Dollar/Rand: R15.16 (1.32%)
- Pound/Rand: R18.42 (1.52%)
- Euro/Rand: R16.84 (1.30%)
Transport was the only sector that experienced a change to the contribution to inflation from 0.8% to 0.4%. The residual also saw a decline from 0.0% to -0.1%, PPS Investments said.
Although month-on-month inflation was unchanged at 0.4%, the contributors to monthly inflation changed quite noticeably. The decline in contribution stemmed from food and non-alcoholic beverages from 0.1% to 0.0% as well as transport from 0.1% to -0.2%. Housing and utilities experienced an increase in contribution from 0.2% to 0.6%, Marinus said.
Investors in South African bonds cheered a slowdown in inflation, which has given the central bank more room to lower interest rates, Bloomberg reported.
Forward-rate agreements moved to price in a 32% chance of a 25 basis point reduction in the repo rate next month, from zero on Monday. Yields on rand-denominated government bonds due December 2026 dropped 10 basis points, the most in a month, to 8.29%, it said.
A rate cut would lower the cost of refinancing government debt and liabilities of state-owned enterprises, said Cristian Maggio, the head of emerging-market strategy at TD Securities in London. That’s good news at a time when the sovereign is increasing borrowing to bail out Eskom Holdings SOC Ltd, the electricity utility.
“The low CPI reading today is positive for the rand as it increases real rates, gives room to the Reserve Bank to cut and thus helps at least marginally on the fiscal side,” Bank of America Merril Lynch strategists David Hauner and Rukayat Yusuf wrote in a client note.
“There is little doubt that the South African Reserve Bank (SARB) is doing a good job at keeping inflation under control, partly as a result of the SARB Governor having taken a more hawkish stance to promote targeting the midpoint of the inflation band. This latest inflation figure though will however pose the question whether another rate cut cannot be justified, especially when considering the growth and unemployment rates in South Africa,” Marinus said.