RESERVE BANK POLICY
Interest rates staying put despite rand slide
Reserve Bank deputy governor Daniel Mminele says policymakers will respond to the rand’s weakness only if it feeds through to the wider economy
SA’s embattled consumers and companies look set to be spared another interest rate hike in the wake of the rand’s slide to a two-year low against the dollar.
Reserve Bank deputy governor Daniel Mminele told Bloomberg on Monday that policymakers, who have managed to keep inflation within the 3%-6% target band for more than a year, would only respond to the rand’s weakness if it fed through to the wider economy.
"We would not overreact to initial price pressures and would be guided by our collective judgment and assessment of how we see knock-on and second-round effects of any price pressures that could then contribute to inflation."
The rand was caught in the crossfire as Turkey’s financial crisis spread, seeing its biggest fall since the depths of the global financial crisis a decade ago, breaking through R15/$ in early trade on Monday.
It pared losses later, to an intraday best of R14.1805, but fell again to R14.4065 by 6.30pm, about 14% lower than where it began 2018. This compares with a 45% drop by the Turkish lira over the same period. India’s rupee hit a record low while Indonesia’s central bank sold foreign exchange reserves.
Locally, the rand has also been hit by a deteriorating economic outlook after the initial euphoria that accompanied President Cyril Ramaphosa’s election and amid policy uncertainty around property rights.
Analysts said the rand’s drop, which pushes up the price of imported goods, was still bad news for motorists and probably killed off any prospect of a cut in petrol prices, which have increased 11% in 2018.
Higher food prices may put pressure on retailers, who have been struggling to pass on costs to customers amid a weakening SA economy.
The lira’s drop came as Turkey’s political battle with Washington over the detention of a US citizen escalated, adding to concerns about political pressure on that country’s central bank to keep interest rates low even as inflation accelerated towards 17%.
While the rand has been partly shielded by perceptions that SA’s central bank is independent and credible, a much smaller portion of the country’s debt is denominated in dollars.
In July, the Bank left the repo rate unchanged at 6.5% and reduced its growth forecast for 2018 by 0.5 percentage points to 1.2%, signalling it was unlikely to respond to faster inflation by raising rates.
While Turkish policymakers clearly needed to hike rates, the Bank would likely look through the rand’s recent moves, said Capital Economics senior emerging markets economist John Ashbourne.
"The rand is currently telling us a lot more about general emerging-market sentiment, than it is about SA in particular," he said.
"The rand is one of the most liquid and easily traded currencies, and often works as a bell-wether for sentiment towards emerging markets," he said.
Nedbank Corporate and Investment Banking strategist Mehul Daya said the rand needed to remain above R14.50/$ for weeks or months to pose an inflation risk, but this was unlikely. "The … effects from the rand into inflation have been dismal amid weak demand from the local economy."
Econometrix MD Azar Jammine said the bank would probably eye a sustained R14.70/$ or upwards before considering raising rates.