Key Moments
- Softer September inflation eased expectations for a November rate hike by the South African Reserve Bank and lifted real interest rates.
- A better-than-expected mid-year budget, with higher revenues and a smaller deficit, supported confidence in South Africa’s fiscal trajectory.
- Commerzbank anticipates near-term pressure on ZAR but expects the currency to regain ground next year amid ongoing structural improvements.
Inflation Surprise Supports Real Yields and the Rand
Commerzbank’s Volkmar Baur highlights that the latest South African inflation figures have reduced the likelihood of additional interest rate increases by the South African Reserve Bank (SARB), while simultaneously bolstering real yields – a combination viewed as mildly constructive for the South African Rand (ZAR).
According to Baur:
“South African prices rose by 0.4% month-on-month in September, slightly less than the Bloomberg consensus forecast of 0.5%. This pushed the annual inflation rate up to 4.5%, also below analysts’ expectations of 4.7%. This is good news, as it suggests that the South African Reserve Bank is unlikely to raise interest rates again in November. Lower inflation therefore translates into higher real interest rates, which should provide some support for the currency.”
| Indicator | Reported | Consensus |
|---|---|---|
| Monthly CPI (September) | 0.4% | 0.5% |
| Annual inflation rate | 4.5% | 4.7% |
Fiscal Outlook: Revenue Upside and Narrower Deficit
Beyond the inflation data, Baur points to recent fiscal developments as another supportive factor for South Africa’s macro backdrop. The latest mid-year budget outcome turned out more favorable than initially feared, contributing to a more positive structural assessment.
Baur notes:
“Revenues are expected to come in higher this fiscal year than previously assumed, while the budget deficit is likely to be smaller. Slower economic growth is expected to result in a slightly higher debt ratio, but the trajectory continues to point downwards, which is encouraging.”
New Fiscal Sustainability Law Welcomed by Markets
A key element of the improving fiscal narrative is a draft law on fiscal sustainability put forward by the Finance Minister. Baur explains that, while the proposed legal framework does not impose strict numerical rules, it aims to hardwire prudent fiscal management into the policymaking process.
As he describes:
“In addition, the Finance Minister presented a draft law on fiscal sustainability. While the proposed legislation does not envisage rigid numerical fiscal rules, it would require every government to set fiscally sustainable targets and report on progress towards achieving them. The aim is to strengthen transparency and accountability in the fiscal process by anchoring these principles more firmly in law. The proposal was received positively by the market.”
Near-Term ZAR Headwinds, Medium-Term Recovery
Despite the combination of easing inflation, firmer real rates, and a more constructive fiscal stance, Commerzbank still expects the ZAR to navigate a difficult period in the short run. However, Baur emphasizes that ongoing structural advances underpin a more optimistic view over a longer horizon.
He concludes:
“We expect the next few months to remain challenging for the ZAR. However, continued structural improvements, such as the proposed fiscal sustainability legislation, reinforce our view that the ZAR should regain ground next year.”
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