A five rand coin. Picture: REUTERS
A five rand coin. Picture: REUTERS

The rand pared gains on Wednesday morning, after a surprise moderation in headline inflation, which, on the margin, helps take pressure off the South African Reserve Bank to raise interest rates.

Economists had expected inflation to rise, citing the cumulative effects of the recent increases in fuel prices, as well as VAT.

"We think that inflation will pick up a bit from here, mostly due to higher petrol prices. But it will remain within target, which we think will encourage policy makers to leave their key rate at 6.5% over the remainder of this year," said John Ashbourne, senior emerging markets economist at Capital Economics.

Reserve Bank deputy governor Kuben Naidoo told Bloomberg TV on Tuesday that a sustainably weaker rand could force its hand to raise interest rates. The rand has been particularly weak in recent weeks, contributing to rises in fuel prices, as well as higher local oil prices. This, in turn, contributed to expectations of high inflation.

Inflation, which the Bank closely monitors to decide rates, moderated to an annual rate of 4.4% in May, from 4.5% in April. The market expected inflation to have accelerated to 4.6% in May, from a matching period a year ago.

Local bonds were a lot stronger in mid-morning trade, buoyed by moderate inflation figures, implying that the central bank could delay raising interest rates. Even so, local bond prices have sold off fairly aggressively in recent weeks and, in the process, pushed up the yields to attractive levels to potential buyers, according to analysts.

The yield on the benchmark R186 was at 9.07%, after spiking to highs of 9.13% on Tuesday, its highest level since mid-December. By contrast, the yield on the US 10-year note was 2.90% in early trade.

The global backdrop was relatively supportive of local assets, including equities, after a sell-off on Tuesday, caused by jitters on global trade.

At 10.30am, the rand was at R13.6983 to the dollar from R13.7501, R15.8353 to the euro from R15.9380, and R18.0172 to the pound from R18.1127. The euro was at $1.1561 from $1.1589.

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