Rand hits 19-month high on rate cuts

The rand firmed to its strongest level in 19 months, holding on to gains notched up overnight after the US Federal Reserve sent ripples through emerging markets’ currencies with an unexpected half-a percentage point rate cut.

The rand, a barometer of a combination of domestic economic conditions and global market trends, was trading 0.4% stronger in evening deals on Thursday at R17.47/$, giving up some of the gains after hitting R17.37/$ in the lead-up to the interest rate meeting of the SA Reserve Bank’s monetary policy committee (MPC). That level was last seen in February 2023.

The local currency — the strengthening of which makes imported goods, fuel and overseas travel cheaper, was taking its cue from other emerging markets currencies after the US central bank slashed its key rate by 50 bps, exceeding the Bloomberg economic consensus forecast of 25 bps.

The rand mostly retained the gains even after the Reserve Bank cut interest rates 25 bps, a loosening size that keeps the interest rates differential in favour of the local currency. 

Investec’s chief economist, Annabel Bishop, said the local currency had strengthened on the widened interest rate differential — the difference in interest rates between the rand and the dollar — after the Reserve Bank opted for a more cautious cut.

“For SA, the markets’ [forward rate agreement curve] only factored in a 25 bps cut [on Thursday] at the MPC meeting, which was the Bloomberg economic consensus too,” Bishop said.

“The rand has strengthened on the widened interest rate differential and could gain further,” she said.

But Ryan Woods, head of trading at Independent Securities, tempered his optimism about the outlook of the currency, citing stickier inflation at home than in the US and that the Bank’s move on Thursday was widely expected.

Debt repayment

However, Woods was optimistic that the reduced rate, with the formation of a government of national unity, would improve SA’s growth, predicting that steady rate cuts could cause the JSE to gain 5%-10% over the next year.

“While the rate cut was small, it will see the man in the street having a bit more money to spend as their debt repayment costs come down a little,” Woods said.

With its easing cycle now under way, the Reserve Bank’s focus is on key inflation indicators reflecting how price levels react to the lower borrowing rate.

“Domestically, the [Bank] expects inflation to average 4.6% this year, from 4.9% projected at the ... MPC meeting in July,” said Investec economist Lara Hodes.

“Following a notable dip in the headline inflation print in August to 4.4% year on year, the central bank’s forecast suggests this progress will be sustained. Specifically, inflation is anticipated to be contained below the 4.5% midpoint over the Bank’s forecast horizon.”

Hodes said the stronger rand, with a lower global oil price, had caused fuel price inflation to decline significantly.

It was likely to help keep headline inflation below the midpoint of the target range through the first half of next year, she said.

websterj@businesslive.co.za