JOHANNESBURG (Reuters) -The South African rand strengthened on Wednesday after the finance minister announced a lower inflation target, a change investors had speculated would come soon and which has fuelled a rally in local assets this year.
At 1325 GMT the rand traded at 17.0650 against the dollar, up 0.5% on Tuesday’s closing level.
South Africa’s international bonds also edged higher as details from the finance minister’s mid-year budget review emerged, with the longer-dated issues gaining the most.
The 2046 maturity gained just under 1 cent to be bid at 77.63 cents on the dollar, up from a gain of under 0.4 cents earlier in the day, Tradeweb data showed.
Godongwana said the inflation target would immediately change to 3% with a 1 percentage point tolerance band either side from a range of 3-6% previously.
But he said the new target would be implemented over two years, suggesting the central bank will be allowed leeway in meeting it initially.
Annual inflation stood at 3.4% in September, the latest month for which data is available.
Financial markets had expected Godongwana’s budget review to contain positive news thanks to indications that revenue collection had been strong this year, even though economic growth remains sluggish.
Casey Sprake, an economist at Anchor Capital, said the market reaction to the budget was broadly upbeat, with the lower inflation target enhancing policy clarity and credibility.
The National Treasury now forecasts a slightly smaller consolidated budget deficit this fiscal year of 4.7% of gross domestic product, compared to May’s forecast of 4.8%.
The Treasury’s economic growth estimates for this year and next have been revised down to 1.2% and 1.5%, from 1.4% and 1.6% respectively.
The Johannesburg Stock Exchange’s Top-40 index was last up 1%.
(Reporting by Alexander Winning, Sfundo Parakozov, Libby George and Ed Osmond)
