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Rand may fall further when Fed moves, Sarb says

Local unit is the biggest risk to the inflation outlook.

South Africa’s rand may depreciate further as the first U.S. interest rate increase in almost a decade isn’t priced in by the currency markets, the Reserve Bank said.

“The rand has been very sensitive to changing probabilities of the Fed hiking rates, suggesting that the first increase is not yet fully priced in,” the central bank said in a report released on Monday in the capital, Pretoria. “It is also unclear whether the rand will stabilize after lift-off, as attention shifts to the pace and timing of additional rate adjustments.”

South Africa’s currency weakened to a record against the dollar on Monday after the nation’s trade deficit in October widened to the biggest in nine months. The rand has lost 20 percent against the dollar this year, adding to pressure on inflation already at risk from rising food and energy costs. Consumer inflation accelerated to 4.7 percent in October and the central bank forecasts it will exceed its 3 percent to 6 percent target band next year.

Further declines in South Africa’s export commodities could lead to more rand weakness, the central bank said. Its forecasts assume that commodity prices will drop further in 2016 and stabilize in 2017, in dollar terms, according to the report.

Drought risk

The rand is the biggest risk to the inflation outlook, which remains relatively unfavorable, according to the central bank. Food-price growth could accelerate if the current drought intensifies, it said.

The Monetary Policy Committee has raised the benchmark rate twice this year to 6.25 percent, even as it cut its growth forecast for the year to 1.4 percent, which will be the slowest pace since 2009. The economy narrowly avoided a second recession in six years in the third quarter. A quarter-point increase in the repurchase rate is projected to reduce the annual GDP growth rate by 0.1 percentage point, Brian Kahn, an MPC member and adviser to Governor Lesetja Kganyago, told reporters on Nov. 19.

The energy crisis is adding to pressure on growth and prices as the state-owned utility seeks higher tariffs to help it keep plants running. An application by Eskom Holdings SOC Ltd. to recover 22.8 billion rand ($1.6 billion) of costs incurred in the 2014 financial year is not yet priced into the inflation forecast and could lead to more price increases, the central bank said on Nov. 19.

“Electricity shortages will keep growth constrained for at least the next two years,” the bank said on Monday.

©2015 Bloomberg News

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In war, truth is the first casualty – Greek dramatist Aeschylus (also quoted by Barry Sergeant is his book, The Assault on the Rand.
I think the worst thing that the South African Reserve Bank could have done or said, was to admit that the Rand may depreciate further against most major currencies, as the first US Interest rate increase in almost a decade is not priced in by the currency market.
The offshore market will interpret this as a licence to sell the Rand against major currencies. This statement, comes hot on the heels of the news today that South Africa’s trade deficit recorded a R21, 39 billion deficit in October 2015.
I am very surprised that this statement came out as the Bank already indicated a couple of months ago that it would not intervene in the market to protect the rand. This statement will encourage the exporters ‘’to stay out of the market’’ and the importers to maintain a very high percentage of forward cover, that will lead to further ‘’leads and lags on the rand.
This statement might just lead to a full blown crisis in the rand in days and weeks to come. Also very interesting that the resources market started weakening, and then plunging during the last couple of months, on news that mining production and exports dropped dramatically in 2015. The weakening rand will at least support the prices of the Rand hedges stocks!
The market was caught long and wrong in energy, resources etc stocks this year and I think the big boys will see some more organised chaos in the next month!

End of comments.

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