The rand breached the R14 against the dollar mark as the markets anticipated an interest rate hike after October’s consumer inflation print spiked 5.1 percent year-on-year from 4.9 percent in September.

JOHANNESBURG – The rand yesterday breached the R14 against the dollar mark as the markets anticipated an interest rate hike after October’s consumer inflation print spiked 5.1 percent year-on-year from 4.9 percent in September.

Statistics South Africa said October’s consumer price index increase was mainly due to a surge in fuel prices in the month. 

Transport price inflation surged from 8.7 percent year-on-year in September to a decade-high of 10.5 percent last month.

October’s inflation print was also the highest since July.

The local currency at 5pm was bid at R13.92 against the US dollar from R14.14 at the comparative time on Tuesday.

Bianca Botes, an analyst at Peregrine Treasury Solutions, said the rand expected a rate hike as inflation accelerated last month.

“The Sarb (SA  Reserve Bank) has come under pressure from the International Monetary Fund to maintain inflation at 4.5 percent so as to preserve price stability,” Botes said.

The increase in inflation has re-ignited the expectation that the central bank will move to raise interest rates at its last monetary policy meeting of the year which concludes today.

Momentum Investments economist Sanisha Packirisamy said the upcoming interest rate decision by the Sarb was likely to be a close call.

“The Sarb’s recent guidance on managing inflation expectations away from the upper end of the inflation target and towards the midpoint suggests interest rates are likely to be raised by 25 basis points (bps) at the November 2018 interest-rate-setting meeting,” Packirisamy said.

Interest rates

Encouragingly, October’s inflation rate was the 19th consecutive month below the 6 percent upper-target level of the central bank.

The last time the central bank’s Monetary Policy Committee (MPC) was meeting, three members voted in favour of an increase of 25 bps, while four members voted to keep interest rates stable.

Since September’s MPC meeting, the price of Brent crude oil has declined 18 percent, while the rand has strengthened by more than 2 percent against the dollar.

However, Sarb governor Lesetja Kganyago’s tone has in recent times raised market expectations of a rate hike.

PPS Investments analyst Luigi Marinus said recent hawkish rhetoric from Kganyago indicated a rate hike.

“Even though the primary objective of the Sarb is to manage inflation, South Africans will broadly be hoping that the low level of gross domestic product growth and disappointing retail sales will be considered in the MPC’s deliberations,” Marinus said.

Retail sales were expected to be boosted by promotions as part of Black Friday.

The prospects of the Reserve Bank keeping its benchmark repo rate at 6.5 percent have also diminished in the face of growing emerging markets volatility.

The Sarb’s Quarterly Projection Model, which served as a broad policy guide in September, suggested five increases of 25 bps by the end of 2020.

FNB chief economist Mamello Matikinca said the recent decline in oil prices and the improvement of the rand exchange rate might see the Sarb downwardly revise its near-term inflation expectations.

“While our view is for a 25 bps increase in the policy rate, benign underlying inflation may delay a policy rate hike,” Matikinca said.

Finance minister Tito Mboweni in October called on the central bank to keep inflation stable and said he was confident that governor Kganyago and his team would continue to work tirelessly to keep inflation down.

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