Rand ‘recovers’ after rate hike surprise

Suggestions rates could rise again before the end of 2014.

Reserve Bank Governor Gill Marcus has announced a 50 basis point rate hike.

The repo rate is now 5.5%.

“Further moves in the repo rate will be highly data dependent. We will continue to monitor developments closely and will not hesitate to act as required in keeping with our mandate,” said Marcus.

Market reaction

The rand reacted sharply to the increase, falling to 11.38 after the announcement from R11.04. However, by 17:13 it had recovered to 11.1970, down 2.42%. 

The currency also declined sharply against the euro and the pound.

At 17:15 our currency traded at: R/Pound: R18.5526 and R/Euro: R15.3245.

All down over 2.62%.

Retail shares also saw a sudden decline, closing in the red. Woolworths (-4.52%), Mr Price (-3.27%), Truworths (- 3.18%), Foschini (-2.59%), Shoprite (-3.46%) and Pick n Pay (-1.18%) all retreated sharply.

The following are comments from South African Reserve Bank Governor Gill Marcus at her latest decision on interest rates:

Inflation outlook deteriorates

“The headline inflation forecast of the bank has deteriorated since the previous MPC meeting mainly as a result of revisions to the assumptions regarding the rand exchange rate.

“The forecast average inflation rate for 2014 is 0.6 percent points higher at 6.3 percent…

“Inflation is expected to breach the upper end of the target range in the second quarter of 2014 and to reach a peak of 6.6 percent in the final quarter of the year before declining to 6 percent in second quarter of 2015…

“The deterioration as a measure of underlying inflation continues to be driven primarily by the lagged effects of the depreciation of the rand exchange rate.”


“The recent depreciation of the rand, if sustained, will raise significantly the risk to the inflation outlook. Our inflation forecast shows a marked deterioration despite the absence of clear evidence of domestic demand pressures.”

Economic challenges

“The MPC carefully considered the economic challenges facing South Africa and the appropriate policy response. On the one hand, inflation forecasts indicate the possibility of being out of the target range for an extended period, largely due to the impact of the depreciating currency.

“The risks to the inflation forecast are seen to be significantly on the upside. Large adjustments to the exchange rate will inevitably impact on inflation, even in conditions of relatively low pass-through such as we have been experiencing.”

Growth – Outlook remains subdued

“Annual growth in 2013 is estimated to have been around 1.9 percent. Although an improved outcome for 2014, growth is still expected to remain below estimated potential output of between 3.0 and 3.5 percent.

“The Bank’s forecasts for growth is 2014 and 2015 have been revised to 2.8 percent and 3.3 percent respectively, down from 3.0 percent and 3.4 percent in the previous forecast round.”

Capital outflows

“Capital outflows and a current account deficit exacerbate the difficulties that lie ahead. Exchange rate pressures are expected to intensify as markets adjust to the new pattern of global capital flows.

“Although monetary policy in the advanced economies remains accommodative, the process of normalisation has begun and the spill overs have implications for our own monetary policy.”

More rate rises seen

South African Forward Rate Agreements (FRAs) due in 12 months jumped to more than 7 percent, suggesting rates could go up by another 150 basis points before the end of this year.

“The decision to hike rates has no doubt been a begrudging response to global factors beyond the control of the SARB as monetary authorities would have been under political pressure to keep policy accommodative,” Tradition Analytics said.

While the ANC is expected to win the election comfortably, its standing has been damaged by the struggling economy, typified by chronic unemployment and widespread social and labour unrest.

In the last two weeks, at least seven people have been killed by police trying to control riots over poor public services in black townships that have seen little improvement in the quality of life since the end of apartheid in 1994.

Trade union federation Cosatu, a formal member of a governing alliance with the ANC, condemned the interest rate hike, saying it would hit growth and jobs.

“While inflation is always a potential danger, it is far less of a problem than South Africa‘s appalling levels of unemployment and poverty, the ticking time-bombs which are already starting to explode in community protests,” it said.

The mining sector, a major source of foreign exchange, continues to be plagued by strikes, with many platinum mines at a standstill due to a week of industrial action.

Unions and management met for a fourth day of talks on Wednesday, but an offer from platinum producers was well below the union demands.

Disputes are harming economic growth, which eased to 0.7 percent quarter-on-quarter in Q3, its slowest pace since a 2009 recession.

Interest rates had been on hold since a cut in July 2012 and two people on the bank’s seven-member policy committee wanted to keep the repo rate at 5.0 percent on Wednesday, reflecting concerns about the impact of higher borrowing costs on the economy.


Chris Hart, economist at Investment Solutions tweeted: “The hike is more substantive than symbolic. Unstated implications are to reinforce confidence, as it was the right even if unpopular decision.”

He also added that his overall impression is that the decision reinforces the Reserve Bank’s independence as she was prepared to take a difficult decision prior to an important election.


“We are quite surprised. Our forecast was that for most of this year we were going to see flat rates. ButIndia and Turkey raised their rates this year and Turkey aggressively so.

“The rand has plummeted in line with the Turkish lira and other emerging market currencies and that, it seems, was the key reason for this increase by the Reserve Bank.

“It seems that there is a feeling, at least by the MPC, that this hike will help put a floor below the rand. It will support the rand somewhat and as a result it will reduce the risk of significantly higher inflation.

“If the move was primarily aimed at supporting the rand, they would have to move a lot more aggressively. Turkey hiked by more than 400 basis points because of the very weak currency.

“In this case it seems that the Reserve Bank is sending a preemptive strike. Our view at this stage is not that this is the beginning of a series of hikes.”


“It was a bit of a surprise to economists, we all probably recognise that it was a relatively finely balanced decision.

“That was indicated by the question and answer session afterwards when Governor Marcus disclosed that two members of the MPC did not agree with the hike.

“The market had been increasingly expecting the hike just prior to the MPC, it was placing a 60 percent probability of a 50 basis point hike.

“So it was a little bit of a surprise if you actually look at the unanimity of economists, but I am sure that all of us would have acknowledged that there was some probability of a hike, although I think many of us were surprised that it came so soon.

“Personally I was quite surprised by how much further upwards they had revised their inflation forecast.”


“We would have expected the rand to appreciate against the dollar as a result of the hike. However, if you look at the other emerging markets economies we now see a much, much bigger interest rates deferential between these economies.”

“Look at Turkey, where they increased interest rates by, call it 400 or 500 basis points, and we only increased it by 50 basis points. The market feels that this hike is not sufficient and is not on par with the rest of emerging markets.

“The rand could still remain under pressure as long as people feel that they are not getting the right bank by moving the money into rand.”


“Obviously the Resevere Bank is very worried about the level of inflation. In the longer term perhaps we will see some (portfolio) inflows because of the high yield that South African can offer now but on the whole … I don’t really see a significant improvement on the rand.”

Tradition Analytics made the following comments:

“This is the first time since June 2008 that the SARB tightened policy and highlights the depth of concern over the emerging market rout witnessed in response to the U.S. Federal Reserve’s decision to taper quantitative easing, and the subsequent inflation risks posed by the severe depreciation in the rand.

“Growth dynamics remain weak, however, and the decision to hike rates has no doubt been a begrudging response to global factors beyond the control of the SARB as monetary authorities would have been under political pressure to keep policy accommodative.

“The decision is possibly the best outcome as it is bound to provide room for a much needed recovery in the rand. More Fed tapering is likely imminent and this should keep EMs, who benefitted greatly from a prolonged period of loose policy which sent a wall of money flooding into its higher yielding assets, in a vulnerable position.

“More rate hikes cannot be ruled out, yet the cycle is expected to be sharp and short lived as economic growth fundamentals remain particularly weak.”


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