Global Courant 2023-05-25 19:17:21
The South African rand plummeted to an all-time weak point at R19.74 per dollar following the latest rate hike from the South African Reserve Bank (SARB).
The SARB’s Monetary Policy Committee (MPC) announced another 50 basis point hike on Thursday (May 25), the tenth in a rate cycle stretching back to November 2021.
Subsequently, the already depressed rand took a massive blow, breaking the typical market reaction where tighter monetary policy stimulates currency growth.
This may imply that markets expected a higher rate hike.
Earlier this week, taking into account the large negative sentiment surrounding South Africa, Investec said a larger 75 basis point increase may be needed to bring back some stability to the currency.
“Higher interest rates are weakening the economy, along with significant power and water shedding capacity and very weak rail and port capacity, all of which are negative for the rand,” said Annabel Bishop, chief economist at Investec.
Commenting on the dip, SARB Governor Lesetja Kganyago said: “The steps we are taking on interest rates may have an effect on the foreign exchange market, but we are not adjusting our policies to deal with the exchange rate. ”
“We are adjusting our policy stance to cope with the effects of the exchange rate on inflation – so we respond to inflation, not the exchange rate.”
The governor said a 75 basis point hike was discussed at the meeting, as well as a rate hold.
“We have considered all of this. Based on the data we have, we came to the conclusion that the right decision to call was 50 basis points,” he said.
The edge has been under pressure for some time. In recent weeks, it has hit record lows following heightened concerns over the prevailing power crisis and power grid collapse, as well as significant geopolitical tension due to allegations that South Africa was supplying arms to Russia.
Prior to the MPC decision, Goldman Sachs’ Andrew Matheny indicated that there were market expectations that the SARB would react to the weak exchange rate.
After the meeting, the rand retreated slightly to about R19.64 per dollar.
Read: Reserve Bank raises interest rates by another 50 basis points
