Rand faces key test as Fed wraps up its policy meeting

The rand, which is trading at its weakest level against the dollar since mid-August, faces a key test on Wednesday night when the US Federal Reserve wraps up a long-awaited policy meeting that is likely to flesh out details for tapering its stimulus package.

The crisis-era stimulus measures were adopted more than 18 months ago to deal with the Covid-19 pandemic.

The key question for the markets is whether the Fed will signal the start of a rise in interest rates, given signs of persistently higher consumer inflation in the US.  Fed chair Jerome Powell has previously sought to separate the tapering of the stimulus from eventual increases in interest rates, arguing that higher inflation was transitory.

The rand, meanwhile, has been caught up in the ebb and flow of the global risk sentiment as uncertainty prevailed on the Fed’s approach on policy.

While relatively flat on the day, the rand has weakened substantially from last week’s levels when it traded at R14.70/$. In early trade, a single dollar bought R15.40/$, the lowest point since August 20, according to the Infront data.

The weaker rand and elevated international oil prices will exert upward pressure on the outlook for SA inflation, which will be of concern to the Reserve Bank’s monetary policy committee, which has kept rates at five-decade low since 2020 to help the economy recovery from the ravages of the Covid-19 pandemic.

Signs of runaway inflation, driven in part by supply-chain disruptions, are turning out to be a bugbear for central banks around the world, with the Bank of England likely to be the first country among the developed world to tighten policy when its own monetary policy committee concludes its scheduled meeting this Thursday. 

Last Thursday, Brazil, one of the major emerging market countries, raised interest rates by 150 basis points, the biggest in nearly two decades, to rein in double-digit inflation.

Elsewhere, Asian markets were mostly weaker, as were commodity prices. Brent crude slipped 0.31% to $83.82.

mahlangua@bdlive.co.za