Rand notes. Picture: THINKSTOCK
Rand notes. Picture: THINKSTOCK

The rand reversed course on Friday afternoon, with the initial euphoria attached to the Reserve Bank’s decision to keep interest rates on hold appearing to fade.

The local currency earlier strengthened to R12.0654 to the dollar, which marked its best level in two-and-half years, before subsequently weakening.

In keeping rates unchanged on Thursday, the monetary policy committee (MPC) stuck to its usual conservative approach, pointing to potential risks on the horizon that could negatively affect the outlook on inflation.

"It remains clear that the MPC does not view monetary policy as the sole solution to the structural growth constraints in the economy, nor that it believes that a reduction in interest rates will provide a significant stimulus to growth in the current environment of low confidence and political uncertainty," NKC Research analysts said in a note.

"The combination of higher international oil prices in recent weeks and the ever-present risk for further rand depreciation, especially if Moody’s Investors Service decides to downgrade SA’s local currency rating further to subinvestment grade at the end of February, clearly pose too high a risk on the otherwise fairly favourable outlook for the [Bank] to cut interest rates," they said.

Bank governor Lesetja Kganyago mentioned the uncertainty around the budget, which Finance Minister Malusi Gigaba is scheduled to deliver on February 21, as well as the ratings review by Moody’s, which it is set to report on shortly after the budget.

Moody’s is the only major ratings company that still has SA’s debt rating at investment grade, after S&P Global Ratings and Fitch both relegated the country to junk status in 2017.

Universal junk status (by all three major agencies) is likely to trigger bond outflows, affecting the rand and the inflation outlook. But the extent of the damage in the event of a Moody’s downgrade remains to be seen.

At 3.39pm, the rand was at R12.2188 to the dollar from R12.1312, at R14.9743 to the euro from R14.8474 and at R16.9520 to the pound from R16.8566.

The euro was at $1.2255 from $1.2239.

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