South Africa Inflation Closer to U.S. Is Good News for Rand

(Bloomberg) -- The narrowing inflation differential between South Africa and the U.S. signals long-term support for the rand and local-currency bonds, according to Standard Bank Group Ltd.

Consumer-price increases in Africa’s most-industrialized economy slowed to 4 percent in January, in the lower half of the central bank’s 3 percent to 6 percent target range. That curbed the inflation differential with the U.S. to below its ten-year average.

South Africa Inflation Closer to U.S. Is Good News for Rand

“This partly reflects the SARB’s success in anchoring domestic inflation,” said Thanda Sithole, a Johannesburg-based economist at Standard Bank, in a note to clients. “According to our inflation forecast as well as the U.S. consensus inflation forecast, this differential will likely remain below 3.5%. And, from a fundamental perspective, that should support both the rand and South African bonds.”

Yields on government bonds due December 2026 have decreased 16 basis points since the beginning of the year, while the rand has gained 0.6 percent versus the dollar in the same period. The rand was trading at 14.2665 per dollar by 11:40 a.m. in Johannesburg, while yields on benchmark bonds traded at 8.75 percent.

Standard Bank said while it had trimmed its inflation forecasts for this year, inflation was unlikely to decline enough to incur interest rate cuts. The bank foresees steady rates in 2019.

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