(Bloomberg) — The rand strengthened below 17 per dollar for the first time since February 2023 after the government adopted a lower inflation target, suggesting interest rates may stay higher for longer than previously anticipated.
The South African currency advanced 0.5% to 16.9979 per dollar by 11 a.m. in Johannesburg. The rand has rebounded 13% since weakening to a record in April after President Donald Trump imposed steep tariffs on imports from South Africa.
Over time, the lower price-growth target will decrease inflation expectations and inflation, creating room for lower interest rates, according to the National Treasury. That would support household spending and business investment, boosting economic growth, it said in a statement.
The move on the inflation goal follows loud advocacy for the change by Reserve Bank Governor Lesetja Kganyago, who announced his preference for inflation to settle at 3% in July. The central bank cut its benchmark rate twice this year but signaled it will stay on hold to bring inflation toward 3% in 2026.
The rand is “benefiting from relatively positive global sentiment and from the South African finance ministry officially adopting a lower target for inflation that may result in the SARB having less room to cut interest rates,” said Piotr Matys, a senior FX strategist at In Touch Capital Markets Ltd. “The prospect of monetary policy divergence between the SARB and the Federal Reserve is a major driving factor for the rand.”
The currency has returned more than 13% in the carry trade this year as the dollar weakened and the Fed cut interest rates. That helped send benchmark bond yields to seven-year lows amid inflows into the government debt market.
“In an environment where carry is king, South Africa still remains attractive from a bond-market perspective and this will likely support the rand in the short term,” said Anders Faergemann, a portfolio manager at PineBridge Investments. “The change to the central bank’s inflation target was well telegraphed but above all it shows a newfound maturity on the institutional front and provides an improved backdrop for investing in the local bond market.”
The yield on benchmark 2035 government rand bonds fell seven basis points on Thursday to 8.61%, the lowest on a closing basis since March 2018.
Elevated precious-metal prices have also supported rand gains, according to Lee Hardman, a senior foreign-exchange strategist at MUFG. Gold soared to a record well above $4,000 an ounce last month, while silver and platinum prices have also climbed. Raw materials account for more than half of South Africa’s export earnings.
(Updates prices, adds analysts’ comments from fifth paragraph.)
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