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.
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.
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