Rand comeback to be short-lived: economist
Although a pause in interest rates will be positive for South African consumers, it could spell trouble for the rand after it staged a mid-year comeback against the dollar.
Despite being one of the world’s worst-performing major currencies in the first six months of 2023, the rand made a significant recovery last week, dropping to R17.69/$ on Friday (14 July) and currently trading at just over R18.00/$.
However, Investec Chief Economist Annabel Bishop said that the South African Reserve Bank’s Monetary Policy Committee (MPC) is likely to leave interest rates on hold, which will be bad news for the rand, as the differential between South African and US interest rates has lessened.
Bishop said that the US dollar weakness was critical to the rand’s rebound, with the greenback reaching 1.1248 to the euro on Friday – its weakest rate since February 2022 when the rand was closer to around R15.00/USD.
Bishop said that global stock markets have gained on recent better-than-expected US inflation data, resulting in the global financial market’s risk aversion waning on hopes that the US interest rate hike cycle will end.
She added that markets have been recalibrating their US inflation expectations on the low cost of living and production price inflation figures that came out last week, which both saw significant drops, with a notable disinflation occurring in the core components.
The US’s Federal Open Market Committee (FOMC) has its next interest rate meeting near the end of the month, 26 July – a week after the MPC makes their decision.
She said that a flat US interest rate outcome would support the rand and underpin further strengthening.
“Weak economic activity in China is seeing the globe’s second-largest economy signalling the potential for additional monetary policy support as the anticipated post-COVID-19 lockdown restrictions recovery proves slow to take hold,” Bishop said.
“Market expectations of a soft landing globally for the world economy add to optimistic financial sentiment. In addition, the US’s University of Michigan (consumer) sentiment and current conditions data on Friday proved better than expected.”
That said, the economist noted that investor concerns persist on South Africa’s domestic issues – such as fragile economic growth, political concerns ahead of the 2024 election and fears over the future of state finances – weigh heavily on the currency.
Moreover, the rand will likely not receive any favours from the FOMC as it will probably hike rates.
“The rand is trading at R20.27/EUR and R23.60/GBP, having made notable gains against the key crosses, with potentially more strength to come, although weakness is likely to be marked on a disappointingly FOMC (higher interest rates) outcome,” Bishop said.
Not the overall consensus
Despite Bishop saying that South African interest rates will likely be on hold, many other economists expect the MPC to hike interest rates later this week, which should help boost the rand.
Nedbank said that the risk of pausing too soon carries a far greater threat than the cost of over-tightening.
“Too restrictive policy can easily be reversed, while structurally higher inflation and persistently rising inflation expectations will require even greater economic sacrifices to rectify,” it said.
Although the Bureau for Economic Research (BER) said that the next interest rate might be a close call, with a possible pause on the cards, it believes that the SARB will likely face an increase in the repo rate by 25bps.
The BER added that despite the better economy, the prevailing market conditions carry many risks, and the SARB will likely not become complacent.
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