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Rand still rattled after stubbornly high inflation data

An uptick in inflation hampered the South African rand on Wednesday, with the currency struggling to regain momentum as investors fret over the government’s quest to “radically transform” the economy. The rand has gained 5 per cent against the dollar so far this year, but took a knock at the start of the week after a report from an anti-corruption watchdog that was seen as an attack on central bank independence. The currency strengthened in early European trading, but fell back after Statistics South Africa reported that the year-on-year inflation increased to 5.4 per cent in May It was practically flat in afternoon trading, at 13.05 per dollar. The South African Reserve Bank has been working to bring inflation back within its target range of three to six per cent after it peaked at 7 per cent last year. May’s increase marked the first rise this year. On a monthly basis prices rose 0.3 per cent, faster than economists had expected. Analysts at US bank BBH said the data were “disappointing” given the rand’s recent strength. BBH added that markets had been “unnerved” by Monday’s report by the public protector, which recommended a constitutional amendment to change the central bank’s mandate. The recommendations would shift the bank’s focus away from managing inflation toward advancing “socio-economic wellbeing”. The South African Reserve Bank criticised the recommendations on Tuesday, describing them as “unlawful”. The call to focus on “meaningful socio-economic transformation” is part of a wider effort from President Jacob Zuma’s government to achieve “radical economic transformation”, and reduce the influence of so-called “white monopoly capital” in the economy. It follows proposals last weekthat miners operating in the country would have to make sure local assets are at least 30 per cent owned by black residents, a move that prompted threats of legal action from the industry. Moody’s analyst Douglas Rowlings said today that if implemented the new mining charter would likely lead to a decline in mining production by deterring new investments. South African assets have so far rebounded quickly after each of their recent shocks, but analysts at ING suggested that the latest run of controversies is rattling investor confidence:

This year investors have been happy to ignore the local negatives in South Africa and chase yield, yet this looks particularly dangerous.

They said the attack on the SARB was particularly “alarming”, adding:

Were the latter to gain traction ahead of the ANC Congress in December, ratings agencies may opt for an early move taking local currency ratings to junk – which we think could knock 7-10 per cent off the rand.