Weak rand threatens South Africa’s inflation outlook
The key risk to South Africa's inflation this year is the weaker Rand.
In 2024, inflation may be around 4.5% or less. This could lead to the South African Reserve Bank (SARB) reducing interest rates around July this year.
Despite the positive projection around interest rates there are still risks to the country's inflationary outlook for this year. The main risks relate to food prices and global commodities coupled by a weaker rand.
The impact that the weaking rand has had on inflation will likely see the SA Monetary Committee focus on rand strength to drive down inflation.
Since 2022 the rand has been weakened by higher US interest rates and increased government borrowing.
South Africa has not really benefited from US interest rates cuts compared to many emerging market economies.
The rand is one of the worst-performing currencies among emerging markets, ranking fourth after Russia, Argentina, and Turkey.
The rand is however undervalued based on its fair value when compared to the dollar, experts say it is undervalued by as much as $3.
These weaknesses are what have been hurting the South African economy as most goods are imported, especially oil, and this has in turn filtered down to the consumer who ends up paying more with a weaker rand.
The rand may gain strength if the US lowers interest rates in the first half of 2024. This is because there will be a widening gap between US and South African bank rates. However, this will only happen if South Africa does not cut rates as well.
Currently, many view March as the first month when the US could likely start cutting rates.
Frequently asked questions
What is inflation
Inflation is the rate of increase in prices over a given period. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.
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