Weak rand threatens South Africa’s inflation outlook

Investec chief economist Annabel Bishop said a weaker rand is a key risk to South Africa’s inflation this year.

Bishop said South Africa’s inflation is likely to average 4.5% or lower year-on-year in 2024, which could see the South African Reserve Bank (SARB) cut interest rates as soon as July of this year.

However, despite this positive projection, there are several risks to the country’s inflation outlook. These risks include food prices, a weaker rand and higher global commodity prices.

Bishop said that, given the marked weakness in the rand, which has contributed significantly to higher inflation, South Africa’s Monetary Policy Committee would likely favourably view rand strength to drive inflation lower.

She said the rand has been weakened by the higher US interest rate environment since 2022, as well as severe risk-off since 2020 and the sharp elevation of government borrowing, which has added to risk-off materially.

In addition, she said South Africa has not benefited substantially from the prospect of US interest rate cuts compared to other emerging market economies.

The rand is the fourth worst-performing EM currency year on year after Russia, Argentina and Turkey’s currencies, according to Bloomberg. 

Bishop said the rand remains undervalued and is over R3.00/USD removed from its fair value against the USD. 

Such substantial weakness has contributed to higher fuel and food costs in South Africa, amongst other inflationary effects.

This is because South Africa’s economy is highly dependent on imports, particularly oil.

As the country’s currency weakens, it must pay more for the goods it imports – a cost passed on to the South African consumer through higher prices, leading to higher inflation.

While the rand has weakened significantly over the past year, should the US cut interest rates in H1 2024, the rand could see some strength as the differential between US and South African bank rates widens if the country does not cut.

March is currently viewed as the first month the US could likely start cutting rates.

Bishop said that a substantially stronger rand would aid in greater petrol price cuts and exert some downward pressure on food price inflation, along with other commodity price inflation rates.