Global Courant 2023-05-17 19:13:19
Things have gotten so bad in South Africa that one of the fundamental laws of monetary policy is beginning to weaken and even break.
A crippling energy crisis, an environment of low growth and deteriorating fiscal standards combined to drive the rand to a record low last week.
But according to economists at Goldman Sachs International, the normal reaction of raising interest rates to defend the currency could prove counterproductive, undermining a fragile economy and pushing the rand even lower.
The South African Reserve Bank wants to support the rand to lower import costs and ease inflationary pressures.
Tighter monetary policy risks “creating a feedback loop for the rand,” Andrew Matheny and Bojosi Morule wrote in a note to clients.
“The risk of overtightening in the face of currency pressures is real and could ultimately undermine the SARB’s policy response.”
The rand reached 19.5148 per US dollar on Friday amid diplomatic tension over US allegations that Pretoria helped ship arms to Russia.
This pushed inflation expectations above the central bank’s target range of between 3% and 6%. It also sparked speculation of more rate hikes following the May 25 decision.
Matheny and Morule raised their forecast and now expect the central bank to deliver a 50 basis point increase to 8.25%. The cuts will not begin until the second quarter of 2024, they said.
The central bank has already tightened 425 basis points since November 2021, with the larger-than-expected 50 basis point increase in March as the latest step.
The central bank is now in a difficult position, with both rate hikes and a pause in the tightening cycle potentially undermining the rand.
“If the SARB does not rise, or even rises by 25 basis points, from the market pricing in 50 basis points, we are likely to see some edge weakness,” said Walter de Wet, an analyst at Nedbank Group. Ltd.
The best policymakers can hope for is avoiding peripheral weakness, rather than strengthening the currency through rate hikes, he said.
“SARB is in a very difficult position,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. “Inflation and the weak edge warrant more rate hikes, but the economy is already suffering from power shortages. I think they want to stop hiking soon, but I’m not sure the market will allow that.”
The rand fell as much as 1.3% to 19.3215 per dollar on Wednesday in Johannesburg. It led the sell-off in emerging markets on the back of the US debt drama and weak Chinese data.
Read: The edge is at a tipping point
