The South African rand was little changed against the US dollar on Monday as investors turned their attention to upcoming inflation figures and a closely watched interest rate decision from the South African Reserve Bank.

The rand was trading at approximately 16.2375 against the dollar at 06:34 GMT, broadly unchanged from its closing level on Friday.

Financial markets are preparing for Wednesday's release of August consumer inflation data, followed by the Reserve Bank's monetary policy announcement.

Traders have increased expectations that the central bank could raise its main lending rate by 25 basis points as policymakers continue to assess inflation risks facing Africa's most industrialised economy.

MARKETS PRICE POSSIBILITY OF RATE HIKE

Money markets are assigning roughly a 60 percent probability to a 25 basis point interest rate increase at Wednesday's meeting.

The South African Reserve Bank currently has its policy rate at 7 percent.

The Monetary Policy Committee left rates unchanged at its July meeting after raising the rate by 25 basis points in May.

That July decision was not unanimous.

Four committee members supported keeping the rate unchanged while two preferred another 25 basis point increase, highlighting continuing concern among policymakers about inflation risks.

JULY INFLATION EASED TO 4.3 PERCENT

South Africa's annual consumer inflation slowed to 4.3 percent in July from 5 percent in June.

Statistics South Africa attributed the decline partly to softer food inflation, smaller municipal tariff increases and lower fuel prices.

Food and non alcoholic beverage inflation fell to 0.9 percent, its lowest level in more than 16 years.

Fuel prices also dropped sharply between June and July, helping reduce headline inflation.

Investors will now be watching Wednesday's August inflation figures for evidence of whether that improvement continued.

SARB TARGETING LOWER INFLATION

Despite the decline in July inflation, the Reserve Bank has continued to warn about upside risks to the inflation outlook.

The central bank is seeking to guide inflation towards 3 percent over time.

At its July meeting, the SARB said underlying inflation pressures remained concerning, particularly in parts of the services sector.

It also pointed to elevated inflation expectations and uncertainty surrounding international energy markets.

The central bank said monetary policy would respond as necessary to ensure inflation moves sustainably towards its target.

RAND HOLDS STEADY

The rand showed limited movement in early Monday trading as investors avoided taking significant positions ahead of the economic data and central bank decision.

Interest rate expectations can have an important effect on currencies because higher rates can increase the attractiveness of assets denominated in that currency.

A rate increase could therefore influence demand for the rand, although currency movements are also affected by the US dollar, global risk sentiment, commodity prices and South Africa's domestic economic outlook.

GLOBAL CONDITIONS REMAIN IMPORTANT

South Africa's financial markets are also responding to developments outside the country.

Global central banks have faced renewed pressure to contain inflation following volatility in energy markets and continued geopolitical uncertainty.

Changes in US interest rates and the value of the dollar can have particularly significant consequences for emerging market currencies including the rand.

Oil prices are another important factor because higher energy costs can increase South Africa's import bill and contribute to domestic inflation.

ALL EYES ON WEDNESDAY

Wednesday will therefore be a significant day for South African financial markets.

Statistics South Africa is expected to publish the latest consumer inflation figures before the Reserve Bank announces its monetary policy decision.

Investors will be watching both the headline inflation figure and underlying price pressures for indications of the direction monetary policy could take.

The Reserve Bank's accompanying statement will also be closely examined for signals about whether further tightening could follow later in the year.

Until then, the rand is likely to remain sensitive to changing interest rate expectations and developments in global markets.