SARB remains in dilemma between high inflation levels and weak real economy

The South African Reserve Bank (SARB) temporarily halted its rate hiking cycle in mid-May. However, it stated that it is in dilemma between high levels of inflation and a sluggish real economy. The economic scenario has not improved since then for the South African central bank. The country’s first quarter real GDP shrank 0.3 percent on sequential basis that resulted in worries that the South African economy might stagnate in 2016 as a whole. The country is due to release its May consumer prices data today. According to Bloomberg consensus, the CPI is likely to have risen 0.4 percent on sequential basis.

The 0.4 percent projection might be too low, but if it holds the total rate might rise to 6.4 percent year-on-year, moving further beyond the central bank’s target range of 3 percent-6 percent, said Commerzbank in a research report. This suggests that the dilemma of the central bank might increase further. Moreover, even if the SARB intends to support the economy, additional rise in price pressure might compel the central bank to hike rates.

This might constitute a stabilizing factor for the ZAR. But global risk awareness continues to be the key driver of rand as seen in the past few months. The central bank is not able to alter that with its monetary policy that is stability oriented. But if the central bank ignores inflation, it might lead to a further risk factor for the ZAR, added Commerzbank.