SARB likely to keep interest rate on hold for time being

The South African Reserve Bank (SARB) maintained its benchmark repo rate at 7 percent last month, as was anticipated. This was after a considerable decline in inflation, which decelerated to 5.9 percent in August from 7 percent in February. But it climbed again in September to 6.1 percent, breaching the upper end of the target band.

A relatively stable South African rand and an idle capacity in the economy are expected to help ease inflation pressure. Thus, the central bank is expected to stay on hold for some time. However, it is likely to start with an easing cycle sometime in the first half of 2017, according to Danske Bank. But this would be provided inflation comes within the target band.

In the past three months, the South African rand has been a top performer amongst the emerging market currencies. Since the ZAR was greatly undervalued, there was a bullish view for the medium –term, noted Danske Bank. However, the size and timing of the strengthening has been slightly surprising.

The nation is expected to muddle through with a reasonably solid medium-term plan and avert a downgrade this year. According to Danske Bank, the USD/ZAR pair is expected to trade at 13.8 on a three month horizon, 14.2 on a six month horizon and 14.5 on a 12 month horizon.