Johannesburg – The rand may again test the R17.50 level per dollar, while the currency’s uncontrolled depreciation may cause the SA Reserve Bank (Sarb) to raise rates by 50 basis points, analysts said on Monday.

The rand’s crash to a new low against the dollar drove South African inflation expectations to the highest in at least three-and-a-half years and fuelled speculation that Sarb will act more aggressively at its policy meeting this month.

The five-year break-even rate, a measure of bond investors’ inflation expectations, rose 21 basis points to 7.45%  on Monday after the rand fell to R17.9169 per dollar in Asian trade. That compares with a six basis-point decline in the break-even rate for emerging-market peer Turkey.

Standard Bank’s Walter de Wet and Shireen Darmalingam said in an emailed note that South Africa’s current-account and budget deficits are likely to weigh on the currency, while any rallies in the unit will be short-lived as investors shun developing nations.

They said the rand’s uncontrolled depreciation may cause the Reserve Bank to raise rates by 50 basis points at its monetary policy committee (MPC) meeting later this month.

“It is hard to see the rand pull back on a sustainable basis,” the Standard Bank analysts said. “In recent weeks we have seen South Africa’s real effective exchange rate fall sharply to levels last seen in 2001 and 2008.

“We note that in both 2001 and 2008, amid a rand slide, the South African Reserve Bank embarked on a fairly aggressive rate hiking cycle.”

“A weaker currency implies a higher inflation profile,” Carmen Nel, an economist at Rand Merchant Bank unit, said by phone from Cape Town on Monday. “You cannot rule out the risk of an interest-rate hike of as much a 50 basis points in January.”

The last time Sarb adjusted interest rates by more than 25 basis points was in January 2014, when it raised borrowing costs by 50 basis points. Since then, the bank has limited moves to quarter-point increases at three meetings, the most recent in November 2015 when the repurchase rate was boosted to 6.25%.

Reserve Bank governor Lesetja Kganyago has forecast inflation will breach the 3% to 6% target range in the first and fourth quarters of this year. Inflation accelerated to 4.8% in November.

Traders have increased bets that Sarb will raise rates by more than 25 basis points at the next MPC meeting on January 27-28. Forward-rate agreements starting in one month, used to speculate on borrowing costs, show investors are pricing in about 40 basis points of rate hikes compared with 27 basis points on Friday.

The rand was 1.6% weaker at R16.5604 per dollar as of 11:10 in Johannesburg.

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http://www.fin24.com/Markets/Currencies/rands-uncontrolled-drop-to-cause-further-rate-hikes-analysts-20160111