- The rand suffered another shock slump this week, while interest rates were hiked for the tenth time in 18 months.
- Another hike may still be on the cards, although some economists warn against it.
- Inflation – especially food prices – is expected to cool in coming months.
- For more financial news, go to the News24 Business front page.
Still traumatised by the recent rand crash triggered by the Russian weapon crisis, South Africans suffered a double blow this week: a large 50 basis point interest rate hike and another shock currency slump to a record low.
For the tenth time in 18 months, the SA Reserve Bank’s Monetary Policy Committee (MPC) hiked rates. Interest rates have now increased by 475 basis points – on a new R2 million home loan at the prime rate, that means R6 200 more a month.
The bank remains concerned about inflation, but for the first time, the MPC acknowledged that rates are now “restrictive” instead of “less accommodative” – meaning that it recognises that interest rates are now not only subduing economic activity, but actively restricting growth.
“The change in communication by the MPC to describing the repo rate as ‘restrictive’ is encouraging and indicative that they may be at the end of this hiking cycle,” the FNB economics team said in a note.
But this may have contributed to the shock sell-off in the rand on Thursday. In the hour following the MPC’s briefing, the rand lost 40c of its value against the dollar, and later hit a record low of R19.8279/$ – 26% weaker than a year ago.
Traders may have dumped the rand because they expected more future hikes. Higher interest rates make rand assets more attractive to international investors.
This was compounded by a remark by Reserve Bank Governor Lesetja Kganyago that further rand weakness was “likely” due to inflation risks, government’s borrowing needs and load shedding.
One analyst, who spoke on the condition of anonymity, said Kganyago’s remark was meant to highlight a potential risk. “But this was not how it came across to the market. The comment was a bit unfortunate.”
The rand is now the worst-performing major currency in the world in recent months – after the Argentinian peso.
Source: Momentum Investments
Some commentators blamed the sharp rand slump on concerns about the economic fallout of another aggressive hike. South Africa’s economy has been wrecked by load shedding and this will have a big impact on government’s fiscal position, all weighing on the local currency.
It appears as if some traders were also preparing for a 75 basis point hike, and when that didn’t materialise, there was a kneejerk sell-off, said Momentum economist Johann van Tonder.
He added that another factor was at play to weaken the rand on Thursday: dollar strength.
Van Tonder points out that on Wednesday, credit rating agency Fitch put US government bonds on “rating watch negative” – meaning that its perfect “AAA” rating was in jeopardy. Fitch is concerned about the risk that the US government won’t be able to pay its debts – for the first time ever.
This is because US politicians are squabbling about whether that country’s debt ceiling – the total amount of debt that the government can borrow legally – can be raised. If it’s not lifted, the US government will default on its debt obligations, which will cause chaos in the bond markets.
Ironically, this gave the dollar a boost against other currencies as investors regard the dollar as a safe haven in times of increased risk.
While the market expects the rand to break through R20/$ in the short term – many local commentators expect that the currency should eventually start to recover.
Van Tonder doesn’t expect the US to block South Africa’s access to AGOA, and should the diplomatic crisis start to ease over the Russian arms accusations, the currency should start to retreat from these levels.
“All the risks that we know of – including load shedding, the Russian issue, sticky inflation, a slowing SA economy and the US banking crisis – are now more than priced into the rand,” says Van Tonder
But FNB’s economists warned that the rand could still come under more pressure if load shedding was worse than expected during winter. Developments at August’s BRICS summit in South Africa – with a potential contentious appearance by Russian President Vladimir Putin – and the political uncertainty of the 2024 elections could still drag the rand lower.
Where are interest rates heading?
Some economists expect that the MPC could push through one more hike of 25 basis points, as inflation is not cooling as fast as it expected. At this meeting, the MPC hiked its forecast for inflation. Also, unusually, all of the MPC members voted for the 50 basis point hike – displaying a hawkish stance.
“(The) interest rate meeting has not definitively closed the door on further interest rate hikes, particularly given the upward revision to core inflation and the unanimous call for a 50 basis point hike in this meeting. As such, we believe this leaves the door open to another possible hike in July,” said Sanisha Packirisamy, economist at Momentum Investments.
But Van Tonder believes this is unlikely, given the large hit the economy is taking. Following aggressive hikes at break-neck speed, the Reserve Bank now needs to pause to see how the full impact of the increases plays out, especially in cooling inflation.
“The MPC has proven its credibility [in fighting inflation]. But they can lose it if they continue to hike. Inflation could move below 6% in June and 5% in July. It would be a policy mistake if they continue to hike… I think they should be more forward-looking,” said Old Mutual chief economist Johann Els.
Van Tonder expects monthly food inflation to start to cool significantly, probably starting next month. This is partly because the prices of many food imports, particularly grains, are fixed for many months as part of future contracts. As these contracts wind down, they should be fixed at lower rates as international prices have fallen substantially. Meat prices have already started to stabilise, and petrol and diesel prices are also set for sizeable cuts in the first week of June.
Still, the MPC only expects inflation to fall below 6% by the third quarter, to reach its target of 4.5% by the second quarter of 2025.
This – and the upside risks to inflation – means that the first interest rate cut may only come by the end of the first quarter in 2024, at the earliest, says Packirisamy.