Global Courant 2023-05-26 14:28:20
The rand weakened further after the latest rate hike from the South African Reserve Bank (SARB), which left it above R19.70 for the dollar, casting economists and analysts in doubt.
After being in arrears for weeks, analysts expected a delay in an announcement that interest rates would be hiked. However, the opposite happened and the rand fell to a new all-time low against the dollar at R19.78.
According to financial group Nedbank, the market’s reaction to the hike ran counter to expectations and signals that investors may not be satisfied with the outcome of the Monetary Policy Committee (MPC) meeting on Thursday (May 25).
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“The MPC probably argued that it is better to err on the side of caution, as the decision is likely heavily influenced by the dramatic fall in the rand and aggressive comments from several Fed officials over the past two weeks,” Nedbank said.
“If the SARB hoped to provide some support to the rand, there was no immediate success, with the rand depreciating further.”
This suggests that the markets were looking for an even bigger rate hike, the group said.
Commenting on the market reaction, Reserve Bank governor Lesetja Kganyago said that while the SARB’s decisions affect the rand, it is not adjusting its policy stance to deal with the exchange rate.
“We are adjusting our policy stance to deal with the effects of the exchange rate on inflation – so we respond to inflation, not the exchange rate,” he said.
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Regardless of the market’s interest rate expectations, however, Nedbank warned that the rand is likely to remain weak and volatile given that tax dodging continues unabated and South Africa’s relationship with Russia will remain in the spotlight until after the 15th BRICS. peak at the end of August.
This was echoed by Investec chief economist Annabel Bishop, who said South Africa’s electricity situation is “serious” and that the shedding of the tax will continue to weigh on all sectors of the economy and damage confidence.
“Indeed, the SARB expects the divestiture alone to deduct two percentage points from growth this year,” she said.
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The central bank’s GDP forecast for 2023 remains broadly unchanged at 0.3% (up from 0.2% at the previous meeting), with risks considered balanced. However, Bishop noted that both domestic and global growth prospects remain “highly sensitive to new shocks,” according to the bank.
In explaining the slightly higher GDP outlook, the Reserve Bank said its current projections show that Q1 growth of 0.4% turned out better than expected. Stats SA publishes the official figures in June.
Nedbank said the Reserve Bank’s rate hike was aggressive and is likely to amplify the downturn in economic activity “which already started towards the end of last year”.
“The cumulative rate increase since November 2021 now stands at a hefty 475 basis points. In our view, monetary policy was already restrictive before today’s dramatic increase, with households cutting spending while increasingly defaulting on their debts,” the report said.
“Demand will weaken even further as the full impact of the previous hikes has yet to kick in. Contracting demand will ultimately erode corporate pricing power and the bargaining power of organized labor, curbing price increases and returning inflation to the SARB’s 4.5% target by 2024.”
As a result, the group said it expects no further increases this year, but upside risks from the divestiture and a fragile edge will keep the repo rate at current levels through the end of the year, it said.
Read: The edge’s best and worst case scenario – and what it will take to make it a reality
