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US inflation soars to an over 40-year high, likely to cement further interest rate increases

A vendor counts out rand banknotes while working in an African craft market in the Rosebank district of Johannesburg, South Africa, on Wednesday, Aug. 26, 2015. Photographer, Waldo Swiegers, Bloomberg.

A vendor counts out rand banknotes while working in an African craft market in the Rosebank district of Johannesburg, South Africa, on Wednesday, Aug. 26, 2015. Photographer, Waldo Swiegers, Bloomberg.

Published Jul 14, 2022

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Economists warn that South African consumers could continue paying more for imported goods as the rand hovers around the R17-mark to the US dollar, amid fears of a US recession of elevated inflation.

The annual inflation rate in the US yesterday accelerated to 9.1 percent in June, the highest since November of 1981, from 8.6 percent in May and above market forecasts of 8.8 percent.

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This 41-year high inflation print will cement fears that the US Federal Reserve will aggressively hike interest rates by another 75 basis points to between 2.25 and 2.5 percent this month.

This will also give strength to the US dollar which is already an investor’s safe haven amid global volatility and has thrown a spanner in the works for South African currency markets.

The rand this week breached the psychological R17 mark to the US dollar, weakening to levels last seen in the later part of 2020 when lockdown restrictions were largely still in place.

FNB chief economist Koketso Mano said the dollar could find additional strength from foster monetary policy tightening in the US as global financial conditions have tightened the central banks’ aim at taming elevated inflationary pressures.

Mano said this made the rand less supported as a currency of a country that is a net exporter of commodities while elevated oil prices can cause demand destruction.

“A weaker rand has an impact on the price of imported goods. Consider some of our clothing, vehicles, food products, the most impactful being the price of fuel,” she said.

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“This means an even higher cost of living for consumers and more pressure on household budgets. Essentially this translates to high inflation and more pressure on the SA Reserve Bank to increase interest rates.”

Analysts are already anticipating the SA Reserve Bank to front load interest rate hikes this year, which means a strong likelihood of no less than 50 basis points at the remaining meetings this year.

Anchor Capital chief investment officer Nolan Wapenaar, who’s been saying for a long time that the rand was undervalued, yesterday said the rand will trade outside of their purchasing power parity (PPP) level for a while.

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Anchor’s PPP-modelled value for the rand vs US dollar at the end of the next 12 months is R14.15/US$1.

Wapenaar said much depended on the stance one takes towards the US being able to avoid a recession, or the rand could weaken to R17.50/US$1 if a US recession does happen.

In the absence of a US recession, Wapenaar said the rand had scope to strengthen towards their fair value range of R14.50-R15.00/US$1.

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“We expect that much of the remainder of 2022 will be difficult for the rand and levels around R16.00/US$1 are to be expected,” Wapenaar said.

“The markets will be more volatile than normal and a level of R17.50/US$1 also remains plausible in recessionary scenarios.”

BUSINESS REPORT

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