JOHANNESBURG - South Africa’s battered rand got a reprieve yesterday, with inflation surprisingly on the downside, alleviating concerns that the South African Reserve Bank (Sarb) will hike interest rates next month. 

Statistics South Africa (StatsSA) said the annual consumer price index rate eased to 4.4 percent in May, from 4.5 percent in April, comfortably within the central bank’s target range of 3 to 6 percent and well below the market consensus of 4.6 percent. 

On a month-to-month basis, consumer prices increased 0.2 percent slowing from a 0.8 percent gain in April. StatsSA said the slowdown in inflation was mainly due to lower prices of food and non-alcoholic drinks. 

The rand strengthened nearly 1 percent against the greenback to R13.67 by 5pm, from R13.77 on Tuesday. 

The local unit has fallen by 7.5 percent against the dollar since early June, making it one of the worst-performing emerging market currencies. This week it hit a seven-month low against the dollar, as emerging currencies jittered on the continuing trade spat between the US and China. 

The senior emerging markets economist at Capital Economics, John Ashbourne, said it would take a large and sustained fall for the rand to have a real inflationary impact. “While the rand has weakened recently, this follows its sharp appreciation at the turn of the year. The currency is pretty strong by recent standards, and essentially flat in year-on-year terms, which is what matters for inflation,” Ashbourne said. 

On Tuesday Sarb deputy governor Kuben Naidoo signalled that the central bank would not respond to recent currency moves unless or until it had a measurable effect on domestic inflation. 

Banking group Barclays Africa said the rand could see out the month at R13.10, a deterioration from the R11.75 forecast it pencilled in  last week. Investec economist Lara Hodes said fuel price pressures continued to weigh on the inflation outcome. 

“We estimate that the long-term structural inflation rate in South Africa is around 5.5 percent year-onyear and continue to forecast a 25 basis points (bp) hike in the repo rate in January 2019, another in March 2019 and a further 25bp lift in 2020 in order to return SA interest rates to  neutral levels,” Hodes said. 

The seven-member Monetary Policy Committee (MPC) last month kept the benchmark repo rate at 6.50 percent after having cut it by 25bps in its previous meeting. However, the MPC at its last meeting said risks to the inflation outlook had now shifted to the upside due to a weaker exchange rate and a higher international oil price. NKC African Economics analyst Elize Kruger said talk of an interest hike is premature. 

“Given the forecast of an upward trend in consumer inflation from here onwards and the recent renewed weakness in the rand exchange rate, we forecast no further interest rate cuts, but that interest rates could remain unchanged at this level for a prolonged period.”