Higher UK Inflation Sparks UK Wage Squeeze Fears, Triggering GBP/ZAR Slide

October 17, 2017 - Written by Frank Davies

STORY LINK Higher UK Inflation Sparks UK Wage Squeeze Fears, Triggering GBP/ZAR Slide

On Monday, the Pound saw a slight appreciation against the South African Rand. GBP opened trading around 17.6522, later ending daily trading in the region of 17.6634.

This advance was triggered by optimism about the UK’s position in Brexit talks, although this positivity has since faded to a large extent.

Pound to Rand Rate Advances despite Widespread Brexit Fears

The Pound has made a small rise against the South African Rand today, following alarming news about UK inflation.

In September, it has been reported that UK inflation rose to 3%, the highest level since 2012.

The reaction to this has generally been poor. Some economists believe that the Bank of England (BoE) should not raise UK interest rates at the present time, given that high-debt households are already suffering from a significant wage squeeze.

Another issue is that the BoE might not even be ready to hike, even for those that support the action.

New BoE policymaker Dave Ramsden has rejected the idea of a near-term rate hike, while Governor Mark Carney has also failed to confirm if he supports a November rate increase.

Rand Slips on Doubts over Zuma Corruption Charges

President Jacob Zuma has yet again factored into recent Rand weakness, leading to a decline against the Pound.

The numerous corruption allegations hanging over Zuma have resurfaced, with Finance Minister Malusi Gigaba calling the development ‘quite concerning’.

Claiming that the allegations ‘raise the political risks’, Gigaba has praised the South African courts for their independence in the matter;

‘From another angle, [these charges] affirm the independence of our courts, the supremacy of the rule of law and the Constitution as the supreme law of the land.

It says that South African courts and South African judges are independent enough to take decisions about whomsoever, regardless of their social or political standings.

It is a good thing. It would be bad if it were swept under the carpet’.

Gigaba has seemingly welcomed the charges, but remains ambiguous about what he thinks will become of Jacob Zuma;

‘We are expecting that a judicial commission will be established, that will deal with all the corruption allegations from whichever angle it emanates.

The African National Congress (ANC), as the ruling party, has said it wants such a commission, and we are looking forward to its announcement and the terms of reference.

The fate of the president can and must be decided by the ruling party which he serves. The ANC is well-capable of taking that decision.

I don’t think there is any urgency for us to pre-empt what is going to happen in December. He is going to step down anyway as leader of the ANC, and that process must be allowed to run its course’.

While corruption charges mounting against Zuma might be considered a good thing given his controversial history, the Rand has likely depreciated because of trader doubts.

Zuma has survived a number of votes of no confidence in the past, in addition to dodging hundreds of corruption charges. If this latest investigation falls through, the Rand could make even greater losses due to fresh trader disappointment.

Further concern has been caused by ZA exporting news, which has shown a -7.3% decline in bulk exports in September.

This decline followed a -7.2% drop in August, while earlier in the year a surge of 34.5% was reported in July.

While this still leaves South African exports in the surplus range, it has been a notable depletion of the earlier, higher figure.

Pound could Crash if UK Wage Growth Slows

The recent Pound to Rand rise could soon disappear, given the nature of upcoming UK data.

Wednesday morning will see UK wage growth announced – projections are for a slight slowdown for wages without bonuses.

If forecasts are accurate, this would make a solid 1% gap between wage growth and inflation, emphasising the extent of the current wage squeeze.

In a similar line, South African inflation data will come out on Wednesday morning – higher inflation is predicted in most fields in September.

The other ZA data to watch out for will be retail sales stats for August, which are forecast to show higher retail activity.

While not considered high-impact news, these results could still trigger a Rand advance against a potentially weakened Pound.

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TAGS: Pound Rand Forecasts