Ahead of one of the most anticipated policy decisions since the outbreak of Covid-19, the rand was near a 10-month low as economists remained divided on whether the Reserve Bank will start raising interest rates to contain faster inflation.
SA’s currency was the second-most volatile among emerging-market peers between Tuesday and Wednesday, with only Turkey’s lira, which is dogged by uncertain policy and a central bank that lacks credibility due to political interference, having bigger swings.
The rand has suffered in recent weeks as investors speculated that surging inflation in developed markets will cause their central banks to tighten policy, making riskier, but higher-yielding assets such as SA bonds less appealing to foreign investors. It approached R21/£ as a report showed UK inflation accelerated to the fastest in almost a decade in October, adding to speculation of higher interest rates from the Bank of England.
While economists say the decision on whether to hike interest rates in SA for the first time in three year is tight, money market trading shows that investors have priced in a cut of 25 basis points. This raises a risk that the currency drop in the event of governor Lesetja Kganyago and the rest of the monetary policy committee (MPC) not delivering.
The Bank “will not be too worried by the recent rand weakness” because gains before this latest bout of weakness had led to it being too strong relative to economic fundamentals, Rand Merchant Bank currency strategist John Cairns said. “They may, however, be concerned that by not hiking they will put more pressure on the rand, and create more volatility.”
A weaker rand fuels local inflation as it raises the cost of imports, notably oil, with SA motorists already paying record prices at the pump. Higher rates may also hurt the rand, with a hit on the economy and increased borrowing costs for the government.
As of 5.30pm on Wednesday, the rand was trading at R15.4665/$, having earlier depreciated to R15.5780/$, the weakest since January 12. The rand is still among the better performing major currencies of 2021 with a 5% drop against the dollar, according to Bloomberg data. Most of the weakness came in the past month and compares with a 30% decline for the lira in 2021. The rand was as strong as R14.3542/$ a month ago.
The release of the latest inflation data contained nothing that may have swayed the MPC, which started a policy meeting on Tuesday and is due to announce a decision on Thursday afternoon. Consumer inflation, as measured by the annual change in the consumer price index, was unchanged at 5% in October, according to Stats SA. That was in line with the median estimate of economists surveyed by Bloomberg.
While the inflation rate has been above the 4.5% point since May, the Bank has been relatively relaxed about the outlook, predicting that the rate will average around the mid point of the 3% to 6% target over the next two years. MPC members have also emphasised that they are ready to support an economy that shrunk in 2020 by the most in a century and has an unemployment rate of more than 34%.
The biggest driver for the rand’s decline has been the prospect that global central banks, most notably the US Federal Reserve, will find themselves behind the curve and tighten policy faster than anticipated. The annual inflation rate in the US was 6.2% in October, while in the UK it was at 4.2%, heaping pressure on their central banks to raise interest rates.
The local currency, often a barometer of sentiment towards emerging market due to being among the most easily traded, was also caught up as investors punished the Turkish lira over an anticipated rate cut, which would take reductions since September to 300 basis points. That’s despite an inflation rate almost four times the official target. That pushed the rand down by as much as 2.1% on Tuesday.
The rand’s 24-hour volatility on Wednesday was at just over 15%, still less than half that for the lira. So-called risk reversals, which show the premium that investors pay to protect against declines in the rand versus gains, showed investors relatively relaxed about the currency’s prospects over the next month. The rate was at 1.81 percentage points, from 3 percentage points in June.
Government bonds were little changed, with the yield on the R2030 note down 2 basis points at 9.44%. On Tuesday, it closed at 9.47%, the most since November 4.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.