Rand takes a hit as markets signal bigger rate hikes to come for South Africa

 ·3 Nov 2022

The rand took a hit in trade on Thursday (3 November) following the US Federal Open Market Committee (FOMC) raising its target range for the federal funds rate to 3.75% – 4.00% – or 75bp higher.

While the rate hike was in line with expectations, the Fed did not take a lighter tone as many had hoped.

According to Investec chief economist Isabel Bishop, the tone of the FOMC became more hawkish, with FOMC members raising their interest rate hike expectations again, and the Fed highlighting that “incoming data since our last meeting suggest that the ultimate level of interest rates will be higher than previously expected.”

“This was not balanced by the repeated communication from the last two meetings that ‘at some point, it will become appropriate to slow the pace of increases, as we approach the level of interest rates sufficiently restrictive to bring inflation down to our 2 percent goal,” she said.

While markets found relief in both the expected hike materialising, and the likelihood that future hikes would be 75bp or lower in size, the tone did not become less hawkish as was hoped, and decidedly held the line on further rate hikes, Bishop said.

“This means both higher interest rates for longer and a higher level of interest rates than was previously indicated by the September dot plot graph, which showed a peak terminal rate of 4.75% to 5.0% next year. The December FOMC meeting will yield a new dot plot graph,” Bishop said.

The rand has weakened to R18.46/USD in response, from a close of R18.26/USD yesterday, with FOMC highlighting that it will “stay the course, until the job is done”.

According to TreasuryOne, the Fed moving from hawkish to more hawkish has put the rand on the back foot along with other emerging market currencies, which could test even weaker levels.

On Thursday afternoon, the rand was trading at the following levels against major currencies:

  • ZAR/USD: R18.42
  • ZAR/EUR: R17.99
  • ZAR/GBP: R20.61

Impact on SA rates

Bishop said that the stance by the US Fed affirms Investec’s expectations that South Africa will hike its interest rates by 100bp on 24 November, with the Federal Reserve Bank hiking by 3.75% so far in the current cycle, and the SARB only by 2.75%.

The Reserve Bank’s last Monetary Policy Committee meeting this year is in November, but the FOMC meets again in December.

“The FOMC communication signals it does not feel ready to slow the pace of rate hikes from 75bp per meeting, and could likely do so again on 14th December, and allowing for a further hike at its next meeting following of 75bp,” she said.

By the end of the year, the FOMC will likely have hiked rates by 5.50% in the current cycle, and South Africa by 4.75%, with the MPC likely to discuss a larger hike than 100bp in November, particularly given the higher end rate now signalled by the FOMC, and so could surprise on the upside.

Reserve Bank governor Lesetja Kganyago said earlier this week that, at 6.25%, the central bank’s repurchase rate is still below long-term levels and is in expansionary territory.

He said the bank would continue to use rate hikes to try and bring inflation under control. The consequences of the central bank loosening its grip on inflation and falling behind global peers as rates are being normalized would be “too costly,” he said.

“The best chance we have with monetary policy to get faster, more job-rich growth is to maintain our focus on price stability with flexible inflation targeting, a proven framework.”


Read: Reserve Bank says more interest rate hikes are coming

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