South African Rand: Recovery scenarios after SARB surprise – Commerzbank

Commerzbank's analyst Volkmar Baur examines the South African Rand (ZAR) following the Reserve Bank of South Africa's (SARB) surprise decision to maintain interest rates. Baur notes the Rand's earlier rise against the US Dollar (USD) has stalled due to the Iran conflict. Baur highlights declining terms of trade, inflation outpacing the SARB's new target, and the July rate hold. Baur outlines three possible scenarios for the ZAR, emphasizing that recovery will be gradual even in positive outcomes.

The first scenario envisages the central bank being correct, with inflation not rising further amidst conflict and high oil prices. In this case, the Rand should recover soon. The second scenario assumes the Iran conflict concludes, and oil prices fall. This would save the Rand due to geopolitical developments, but a risk premium would persist due to the tarnished SARB credibility.

The third scenario posits the Iran conflict continues, oil prices stay high, and the SARB reverses its decision. High energy prices would continue to strain the Rand, but the central bank could rebuild market confidence over time.

A less likely possibility is the SARB refraining from further interest rate hikes despite ongoing inflationary pressure, which would put significant pressure on the Rand. Even in the more optimistic scenarios, it will take time for the Rand to recover.