The rand weakened even further following the latest interest rate hike from the South African Reserve Bank (SARB), keeping above R19.70 to the dollar and giving economists and analysts pause.<\/p>\n
After being on the back foot for weeks, analysts anticipated a reprieve on an announcement that rates would be hiked. However, the opposite happened, and the rand tanked to a new record weak point against the dollar at R19.78.<\/p>\n
According to finance group Nedbank, the market reaction to the hike was counter to expectations and signals that investors may not be satisfied with the outcome of the Monetary Policy Committee (MPC) meeting on Thursday (25 May).<\/p>\n
“The MPC probably argued that it is better to err on the side of caution, with the decision likely heavily influenced by the rand\u2019s dramatic slide and the hawkish comments of several Fed officials over the past two weeks,” Nedbank said.<\/p>\n
“If the SARB hoped to offer some support to the rand, there was no immediate success,<\/strong> with the rand depreciating further.”<\/p>\n This suggests that the markets were banking for an even larger rate hike, the group said.<\/p>\n Responding to the market reaction, Reserve Bank governor Lesetja Kganyago said that while the SARB’s decisions affect the rand, it doesn’t adjust its policy stance to deal with the exchange rate.<\/p>\n \u201cWe adjust our policy stance to deal with the effects of the exchange rate on inflation \u2013 so we are responding to inflation, not the exchange rate,” he said.<\/p>\n However, regardless of the market\u2019s rate expectations, Nedbank warned that the rand is likely to remain weak and volatile, given that load shedding continues unabated and South Africa’s relationship with Russia will remain in the spotlight until after the 15th BRICS Summit in late August.<\/p>\n This was echoed by Investec chief economist Annabel Bishop, who said that the electricity situation in South Africa is “dire”, and load shedding will continue to weigh on all sectors of the economy, breaking confidence.<\/p>\n “Indeed, the SARB expects load shedding alone to deduct two percentage points from growth this year,” she said.<\/p>\n The central bank’s GDP forecast for 2023 remains largely unchanged at 0.3% (up from 0.2% at the previous meeting), with the risks viewed as balanced. However, Bishop noted that both domestic and global growth prospects remain \u201chighly sensitive to new shocks\u201d, according to the bank.<\/p>\n In explaining the slightly higher GDP outlook, the Reserve Bank said that its current projections show that Q1 performed better than expected at 0.4% growth. Stats SA will publish the official figures in June.<\/p>\n Nedbank said the rate move from the Reserve Bank was aggressive and will likely amplify the downturn in economic activity, “which already started towards the end of last year”.<\/p>\n “The cumulative rise in interest rates since November 2021 now amounts to a substantial 475 bps. In our opinion, monetary policy was already restrictive before today\u2019s dramatic hike, with households cutting back on spending while increasingly defaulting on their debt repayments,” it said.<\/p>\n “Demand will weaken even further, as the full impact of the previous hikes is still to take effect. Shrinking demand will ultimately erode companies’ pricing power and organised labour\u2019s bargaining power, helping to subdue price increases and return inflation to the SARB\u2019s 4.5% target in 2024.”<\/p>\n As a result, the group said it does not expect any further hikes this year – but the upside risks posed by load-shedding and a vulnerable rand will keep the repo rate unchanged at current levels until the end of the year, it said.<\/p>\n
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