SARB monetary tightening for cyclical effects of headline inflation, ZAR volatility and unemployment

In South Africa, the source of lower than projected inflationary heaviness remains unclear. While FX depreciation and a significantly undervalued rand should be pulling inflation back above 5%. Nevertheless, the latest reading for August was below expectations at 4.6% y/y against 4.8% y/y for consensus.

The slack in the job market could be partially to blame. Power consumption is also declining, which should be a boon given the ESKOM debacle and its constraints.

We did not expect that inflation data out the day of the decision would be released as low as it was. Core inflation remains at 5.3% y/y, suggesting the impact of lower commodity prices on headline could be transitory. We reckoned SARB would follow up with an additional hike at its September meeting after the surprising decision to hike in the previous gathering.

We believe that exchange rate pass through may raise inflation later this year. SARB will likely therefore tighten an additional 25 bps at the November 19th monetary policy meeting.

Currency volatility will likely be to blame on the decision. SARB's FX reserves holdings remain insufficient to stave off excessive positioning at extreme daily trading behavior.