When South African Reserve Bank governor Lesetja Kganyago and his colleagues on the monetary policy committee decided to cut interest rates in late March, they could hardly be accused of being reckless.
The decision was a close-run thing and the accompanying statement was cautious about the outlook. It is almost safe to say that recent developments in currency and emerging markets will see that persist and anyone hoping for another cut anytime soon will be disappointed.
That reduction, which took the benchmark rate to its lowest level in two years, came at a time when the country was in somewhat of a celebratory mood after Cyril Ramaphosa replaced Jacob Zuma as president in February, about two months after winning the leadership of the governing party. Good news on ratings, rising consumer and business confidence and a rand that was trading near its strongest level in about two years all added to the optimistic mood.
The adage about the world catching a cold when the US sneezes still applies, and the stronger dollar has by far been the most important driver
Nothing much has changed since then and, if anything, the positive sentiment has been reinforced, even amid the violent protests that have swept across much of the country. Growth is not spectacular by any stretch of the imagination but is still on an upward trajectory. And inflation is under control.
The rand, however, is down more than 6% to the dollar since the March 28 decision, making it one of the worst-performing major currencies tracked by Bloomberg.
The latest trigger appears to have been Argentina’s currency woes, which led to that country’s central bank shocking investors by raising it main interest rate to 40%. With Argentina’s economy very much on the margins, it is not the only thing driving sentiment and it would not normally be expected to have a generalised effect on other markets.
The adage about the world catching a cold when the US sneezes still applies, and the stronger dollar has by far been the most important driver. This highlights how our fate is not entirely in our own hands. As an open and relatively small economy, we are vulnerable to developments outside our borders. With global central banks moving towards policy normalisation after years of almost zero (negative in some economies, including the eurozone) interest rates, it was always unlikely that SA could sustain a move in the opposite direction. The reason for that is our reliance on foreign capital to fund our current account deficit.
So when rates rise in the US, with yields on the US 10-year treasuries jumping above 3%, emerging markets like ours need to follow suit in order to maintain the premium that compensates investors for the perceived higher risk of holding our bonds.
That spread has been narrowing as the US Federal Reserve has moved interest rates higher, supporting the dollar and helping to push the rand lower.
As if this was not enough, international oil prices are surging, with investors spooked by the prospect of US President Donald Trump pulling the country out of the Iran nuclear deal negotiated by his predecessor. A deadline to decide, set for this week, is fast approaching. Prices leapt above $76 a barrel on Monday to their highest levels in more than three years. As an importing country, it will not be long before we feel the effect in the form of higher petrol prices. The risk for the Reserve Bank is that this starts to influence workers’ inflation expectations and leads to an acceleration of price rises across the economy.
The monetary policy committee is not scheduled to meet again for about two weeks, and as recent events have shown, a lot can change in a fortnight. As things stand, Kganyago and his colleagues would not seem to have much room to manoeuvre, and we should just be grateful if they are able to simply play things steady. We are a long way from even thinking about raising interest rates, let alone anything like the move we saw in Argentina last week, but if there was any sense of complacency about the direction of borrowing costs, that should be long gone.