The market impact of inflation surprises in South Africa

Inflation surprises are expected to change market expectations of how the central bank’s policy settings will change, and cause repricing of short term rates and risk premia, which should affect the market value of a variety of assets. This note assesses the sensitivity of the South African rand and sovereign yield curve to inflation surprises. Though impacts are generally small in absolute terms, we show that the currency tends to appreciate after positive headline inflation surprises, while the currency has tended to depreciate after positive core inflation surprises. Contrary to expectation, we show that positive headline and core surprises have tended to be associated with a flatter curve. Our results suggest that the impact of inflation surprises tend to be swamped by external shocks or spikes in domestic idiosyncratic risk. We note, for example, that the largest day-to-day shifts in the yield curve and currency on days of consumer price data releases have been associated with external shocks or spikes in South Africa-specific risks.