Things have got so bad in South Africa that one of the fundamental laws of monetary policy is beginning to weaken, and even break.<\/p>\n
A crippling energy crisis, a low growth environment and deteriorating fiscal metrics combined to push the rand to a record low last week.<\/p>\n
But the normal response of raising interest rates to defend the currency may prove counterproductive, undermining a fragile economy and pushing the rand even lower, according to economists at Goldman Sachs International.<\/p>\n
The South African Reserve Bank wants to support the rand to cut the cost of imports and ease pressure on inflation.<\/p>\n
Tighter monetary policy risks \u201ccreating a feedback loop for the rand,\u201d Andrew Matheny and Bojosi Morule wrote in a note to clients.<\/p>\n
\u201cThe risk of overtightening in the face of FX pressure is real and could ultimately undermine the SARB\u2019s policy response.\u201d<\/p>\n
The rand on Friday reached 19.5148 per US dollar amid diplomatic tensions over US accusations that Pretoria helped ship arms to Russia.<\/p>\n
That sent inflation expectations above the central bank\u2019s target range of between 3% and 6%. It also stoked speculation over more interest rate hikes after the May 25 decision.<\/p>\n
Matheny and Morule raised their forecast and now expect the central bank to deliver a 50 basis-point hike to 8.25%. Cuts will only begin in the second quarter of 2024, they said.<\/p>\n
The central bank has already delivered 425 basis points of tightening since November 2021, with March\u2019s bigger-than-expected 50 basis-point increase the latest move.<\/p>\n
The central bank is now in a tough position, with both rate hikes and a pause to the tightening cycle both potentially undermining the rand.<\/p>\n
\u201cIf the SARB doesn\u2019t hike, or even does a 25 basis-point hike, versus the market that is pricing in 50 basis points, we are likely to see some rand weakness,\u201d said Walter de Wet, an analyst at Nedbank Group Ltd.<\/p>\n
The best policymakers can hope for is avoiding rand weakness, rather than strengthening the currency through rate hikes, he said.<\/p>\n
\u201cSARB is in a really tough position,\u201d said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. \u201cInflation and the weak rand warrant more rate hikes but the economy is already suffering from power shortages. I think they want to stop hiking soon but I\u2019m not sure the market will let them.\u201d<\/p>\n
The rand fell as much as 1.3% to 19.3215 per dollar in Johannesburg Wednesday. It led the selloff in emerging markets prompted by the US debt drama and weak China data.<\/p>\n