South African Reserve Bank likely to maintain bias for higher rates, says Commerzbank

In spite of subdued economic growth in South Africa and a stronger rand, inflation has decelerated just slightly since its high of 7 percent in February. The consumer price inflation continues to be stuck above the South African Reserve Bank’s target, with high food prices because of the drought also playing a role.

The underlying price trend is moving sideways just below 6 percent. The central bank has reacted to stubborn inflation and imminent further administered price rises for electricity with additional interest rate increases. After raising the key interest rate by 50 basis points last year, two further steps of a further 75 basis points in total followed in the first quarter of 2016. Since then, the key interest rate has been stable at 7 percent, noted Commerzbank in a research report.

Given its quick reaction, the South African central bank has sent out a clear signal that in spite of a subdued economic growth, controlling inflation is its main priority. It projects headline inflation to come back to the target band in the second quarter of 2017. However, real interest rates continue to be relatively low as compared with other emerging markets. After Trump’s election, they might be sees as too low and weigh on the South African rand. There is also a risk of rating downgrades in the midst of the political uncertainty. There is a possibility of a bias for higher rates from the South African Reserve Bank, added Commerzbank.