EDITORIAL: The rand is facing a wall of negative sentiment

Why the rand tanked after the Reserve Bank hiked interest rates by 50 basis points is still not entirely clear. Whether the currency came under attack because market players wanted to see a larger hike, or a smaller one, remains a puzzle. That was especially so given that 50 bps had been the market consensus going into the monetary policy committee meeting last week, with just a handful of traders punting 75 bps at the last moment.

What is clear, however, is that the rand is facing a wall of negative sentiment. That the currency reacted so badly to a hike that should have been substantial enough to support it demonstrates that markets are no longer giving SA the benefit of the doubt. And that’s even with the strong signal of a unanimous decision by the committee — its first in 18 months — as well as some hawkish rhetoric.

The rand was already the year’s worst-performing emerging market currency even before the Lady R drama spooked the market, raising the prospect that the US might impose secondary sanctions on SA. That just added to the ultra-high load-shedding and ultra-low growth which had already driven away investors, with greylisting piling on a bit more negative sentiment. Then came last week’s decision. A throwaway line by the Bank that “further currency weakness is likely” may have been all that was needed to send the rand hurtling towards R20/$. At the weekend it was trading at R19.66/$, far above the R18.68 starting point the monetary policy committee was assuming at last week’s meeting.

The danger now is that the rapidly sliding rand could force further substantial hikes by the Bank at its next meeting or meetings. It has already increased rates by a cumulative 475 bps since it began the hiking cycle in November 2021. At 8.25% the benchmark repo rate is now officially in “restrictive” territory. In other words, it is expected to slow an already static economy, with the intent of getting inflation under control. 

The Bank was faced last week with an inflation outlook and inflation expectations that were significantly worse than at the time of its previous meeting two months ago — hence its decision to hike, and governor Lesetja Kganyago’s warning that monetary policy would stay restrictive until inflation was clearly heading down to the target, which is effectively 4.5%. The Bank now expects inflation to average 6.2% this year and to hit the target only by 2025. Most economists don’t expect rate cuts to start until the second quarter of next year. And we could be looking at further hikes, and longer delayed cuts, if the risks the Bank warns of materialise.

The rand and food prices were the big drivers of the gloomier inflation forecast the Bank presented. Record load-shedding is implicated in both. Not only is it fuelling negative sentiment towards the rand, but it is also directly raising the cost of doing business.

The danger now is that SA might be in a vicious cycle in which the weaker the rand and the worse the load-shedding, the higher inflation will be, and pressure will grow on the Bank to stay restrictive — raising the prospect that the economy will go into recession.

Those drivers of inflation are not within the Bank’s control. But they are within the government’s control. All the self-inflicted rand-weakening woes this year are inflicted on SA by the government itself, from the corruption and incompetence that has eroded Eskom and Transnet and economic growth, to the inadequate law enforcement that has got us greylisted, to the high government debt level which is also feeding into rand weakness. It’s all reflected in the country risk premium which investors attach to SA, which has risen sharply. And ultimately it is the government which is responsible for that risk premium.

The risk premium influences inflation indirectly. The Bank pointed too to the role public sector agents play in raising inflation through above-inflation increases in municipal rates and charges and other administered prices. It pointed a discreet finger too at labour, and at rises in unit labour costs. Essentially, as the statement explained, the Bank wouldn’t need to impose such high-interest rates if SA had a prudent public debt level, more electricity, lower administered price inflation and wage growth in line with productivity growth. 

The rate rise and the rand’s decline sent a clear message: if the underlying causes of exchange rate weakness and of inflation are not addressed, we can expect rates to be higher for longer. It is within the government’s control (not the Bank’s) to address these.