Rand unfazed by weak producer inflation and a firmer dollar

The rand was firmer on Thursday afternoon, despite the release of weaker-than-expected producer price inflation and the dollar having gained against the euro following the US Federal Reserve’s rate hike on Wednesday.

Headline producer inflation accelerated to 6.3% in August from 6.1% in July, much higher than the consensus forecast of 5.9%. It is likely that a lower figure would have supported the rand, as  that reduces the possibility of further rate hikes by the SA Reserve Bank.

Nedbank analysts said consumer inflation was expected to increase in the next few months. “But we do not foresee a rise above the Reserve Bank’s 6% upper target over the medium term.”

This relatively benign inflation outlook and the still weak economy will probably convince the Bank’s monetary policy committee (MPC) to delay hiking rates for as long as possible, Nedbank said.

The dollar regained some lost ground on the day after the market initially saw the Fed’s forward view as less hawkish, causing the euro to gain on the greenback. However, according to the Fed’s dot plot, there will be one more rate hike in the US in December, followed by another three in 2019.

The central question for investors is how Fed officials can balance the need to raise rates to keep the economy from overheating without hurting growth in the process, Dow Jones Newswires reported.

While the bond market was largely steady following the Fed’s decision, some analysts remain wary of the possibility of further rate increases adding stress to interest-rate sensitive areas of the economy, such as housing and the automotive sector, the newswire said.

The US economy has been growing at a fast pace this year and the unemployment rate has fallen to multi-year lows.

At 3pm the rand was at R14.1285 to the dollar from R14.1348, at R16.4946 to the euro from R16.5969 and at R18.5442 from R18.6118 to the pound.

The euro was at $1.1674 from $1.1742.

Local bonds were marginally firmer, but the benchmark R186 is still struggling to break back below 9%. It was last bid at 9.035% from 9.07%.

The 10-year US treasury yield fell to 3.035% after the rate decision, compared with 3.059% on Wednesday. It was last seen at 3.0696%.