Continued tightening in global financial conditions, a change in investor sentiment towards emerging markets, escalating trade conflicts, geo-political developments, and idiosyncratic risks.
These remain the key risks to the rand, according to Daniel Mminele, deputy governor of the South African Reserve Bank (SARB), who was speaking at the Bloomberg FX’18 conference on Wednesday (28 November).
Because of these risk factors, Mminele said it is likely that the rand along with other emerging market currencies will remain volatile heading into 2019.
“As a consequence of the recent volatility, exchange rate forecasts remain widely dispersed,” he said.
“Between this quarter and the third quarter of 2019, the exchange rate of the rand is expected to average R14.50 to the US dollar – this is according to Bloomberg median forecasts.
“However, the difference between the most optimistic and the most pessimistic survey participants on the exchange rate forecast for the first quarter of 2019 is almost R3.00 – I have little doubt that one of the participants somewhere within that range will be correct.”
Mminele added that such a wide dispersion around the median forecast over such a short forecast horizon is representative of the uncertainty that has become an inherent part of South African’s lives.
“This uncertainty adds significant complexity to the conduct of monetary policy, the most recent outcome of our monetary policy meeting and the finely balanced decision being a good case in point,” he said.
Because trade is so volatile, Mminele said that the monetary policy committee will remain flexible in its responses.
“We will continue to allow the exchange rate to absorb the initial shocks, and focus our policy actions on addressing second-round price effects,” he said.
“It is important that policy decisions should not be informed by short-run market developments in either direction.”