SA will need to watch for the "realignment" of exchange rates that can be expected as the Federal Reserve starts to tighten US monetary policy, the Reserve Bank has warned. It signalled that inflation may rise faster than expected, with global factors driving the rand down and fuel and food prices up.
Speaking in the final session of a centenary conference hosted jointly by the Bank and the Bank for International
Settlements (BIS), governor Lesetja Kganyago and the GM of the Basel-based BIS, Agustin Carstens, warned that it would be difficult to predict how long the supply side constraints and bottlenecks that have driven up global prices would last, though they are expected to abate as the pandemic subsides.
Kganyago said it is only a matter of time before the supply constraints and rising inflation in advanced economies catch up with emerging markets. Given what is happening with energy and food prices globally, inflation is going to go up in emerging markets — and this may be combined with a depreciation of currencies, lifting inflation.
"As the developed world normalises policy, there is bound to be a realignment of exchange rates, and there has got to be a repricing of financial assets. And all of those are going to feed themselves into the inflation outlook," Kganyago said.
Policymakers must take care not to choke off a nascent economic recovery, "but there is no question if the rise in inflation is persistent and not transitory, then we will have to adjust".
Though SA’s inflation rate is still well under control, the Bank warned in its monetary policy committee statement in September of upside short-term risks to inflation, such as global food and oil prices. It cited a weaker currency as one of the longer-term upside risks to inflation.
Markets now expect the Bank may start hiking interest rates as early as November.
With the Fed due to start next month on a process of withdrawing the monetary stimulus it put in place to support the US economy through the pandemic, there is global uncertainty about the effect on emerging-market currencies. Memories are still fresh of the 2013 "taper tantrum", which savaged emerging-
market currencies when the Fed started withdrawing the stimulus it had put in place to ride out the global financial crisis.
Most emerging markets are now in a stronger position than they were then but they are still vulnerable to capital outflows that would weigh on their currencies, as global investors move their money back to the US to take advantage of rising interest rates there and as the dollar strengthens.
In SA’s case, economists note that the rand was trading around R7 to the dollar on the eve of the taper tantrum and since then has never been stronger than R12/$, reflecting the global realignment of currencies between emerging and advanced markets that followed the Fed’s 2013 move.
He said SA is less vulnerable than it was in 2013, with a fairly strong balance of payments.
The temporary commodity boom has given the government space to do fiscal consolidation faster than it would have otherwise. However, the biggest risk would be for the Treasury to pretend this is a permanent situation.
Carstens said the supply-side disruptions that have emerged as the global economy recovers suggest that while policymakers have done a good job of managing aggregate demand through the pandemic, more work needs to be done on aggregate supply – and this would require open borders and free trade.
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