The rand's gains against major world currencies have strengthened the case for the Reserve Bank to keep interest rates on hold for the rest of the year - even if inflation, as expected, keeps rising.

The rand's performance is a key factor in the Reserve Bank monetary policy committee's decision-making.Economists are forecasting that the rand's stronger levels will be maintained and foresee the possibility of further gains against major currencies in coming weeks as the global search for yield continues to boost emerging market assets.Piotr Matys, a foreign exchange strategist at international financial services group Rabobank, said the rand had also rallied against other emerging market currencies in Central and Eastern Europe, the Middle East and Africa.story_article_left1A driver for the currency is renewed demand for emerging market bonds as yields on bonds in developed economies plunged to an all-time low.Since the previous committee meeting in May, the rand has traded in a range of R15.80 to R14.22 and appreciated 11% against the dollar, 12.9% against the euro and 23% against the pound.On a trade-weighted basis the rand has appreciated by 12%.Matys said the rand could retreat further. "The 14.11/ R13.89 area forms an important support at this stage, which needs to be cleared to expose lower levels," he said.But he cautioned that the fresh wave of capital inflows into South African assets could prove unsustainable and would be reversed, at least partially, unless the outlook for the global economy improved.Uncertainty following UK voters' decision to exit the EU is among global growth concerns that have dissuaded the US Federal Reserve from hiking interest rates in the near term.The chance of it hiking them at least once this year remains below 50%. The Bank of England, the European Central Bank and the Bank of Japan are leaning towards monetary stimulus to counter weak economic growth.The central banks of New Zealand and Australia are also leaning towards interest rate cuts.Reserve Bank governor Lesetja Kganyago said on Thursday: "The impact of the more appreciated rand exchange rate on the inflation outlook will depend to a large extent on whether the exchange rate is sustained at those stronger levels."Matys said that if the government fully implemented structural reforms to set the economy on a recovery path this could further boost the rand - even though it would "remain one of the most sensitive currencies to any new episodes of risk aversion".Ricardo da Camara, financial market economist at ETM Analytics, said: "The probability of seeing another rate hike by the end of the year is very low for the Reserve Bank. It just depends on how hard the other central banks decide they want to push their accommodation."Da Camara said that if yields in developed markets dropped further into negative territory this would push investors elsewhere - probably towards South African bonds and equities, which would be a boon for the rand.story_article_right2But Xhanti Payi, head of research at Nascence Research, said: "I wouldn't venture into the short-term movements of the rand. I would say we can expect continued and even increased volatility, especially given the risks in Europe and [the UK's exit from the EU]." Brexit is expected to affect trade agreements and growth expectations.South Africa's growth outlook is under pressure - one of the reasons the Reserve Bank held the repo rate steady at 7%.The bank is expecting no growth this year and economic growth of 1.1% and 1.5% over the next two years.Colen Garrow, an economist at Lefika Securities, said: "With forecasts as low as these, it is difficult seeing how the economy can escape falling into recession."Meanwhile, Kganyago said the bank's average inflation expectation for 2016 was revised to 6.6% from 6.7% previously and to 6% in 2017 from 6.2% before.Inflation is expected to peak at 7.1% during the fourth quarter from a previous forecast of 7.3%.The Reserve Bank's downward revisions were due to lower administered price inflation on mainly petrol despite small upward adjustments in the international oil price assumption.speckmana@sundaytimes.co.za..