The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

The rand’s recent deterioration may force the Reserve Bank to consider earlier interest-rate increases despite economic growth remaining subdued.

Rate hikes might be necessary to blunt further weakness in a stronger dollar environment, analysts said. This despite the economy contracting 2.2% in the first quarter.

The Bank has said its models imply one rate increase of 25 basis points in the final quarter of 2018 and a similar increase in mid-2019. It emphasised that the bottom of the inflation cycle had been reached.

SA with its fiscal and current deficits is particularly vulnerable to risk-off sentiment.

"The economy is not in a position to afford rate hikes, but the question is whether the Bank can afford not to hike in the present environment," said Herenya Capital Advisors trader Petri Redelinghuys.

The rand tumbled through R13 to the dollar on Friday, reaching a six-month low of R13.2871/$, before recovering as the euro fell to $1.1745.

Economists said the Bank would be loath to increase rates under the circumstances, citing its stance of "looking through" the first-round effects of any inflation shock.

Nedbank economist Johannes Khosa said the Bank was likely to keep rates unchanged in 2018. "We see rates rising moderately late in 2019, despite further deterioration in inflation."

Redelinghuys questioned if the Bank could afford to wait, as the weaker rand and higher oil prices were set to drive inflation sharply higher. "The R12.80 to the dollar level is crucial."

If the rand remained at these levels for a considerable time, the market could price in further weakness, but if it could firm through R12.80, further strength could be expected, he said.

At present levels the rand may be oversold and could be due for a correction.

"Whispers in the market have pointed to a big deal going through on Thursday afternoon that worsened the slide, as well as a further run on stop losses," TreasuryOne trader Andre Botha said.

Much of the rand’s weakness is the result of the US Federal Reserve’s decision to reduce purchases of US treasuries, coinciding with the Fed’s policy to increase rates gradually. The present monthly pace of selling of $20bn could rise to $50bn over the next few months, reducing the availability of dollar funding for emerging markets.