South Africa: Rates unchanged, but upside risks remain

By Francois van der Merwe, Head of Offshore Investments at Novare

The rand touched its weakest level in two months following the South African Reserve Bank Monetary Policy Committee’s decision to leave interest rates unchanged. The Reserve Bank’s decision to keep rates steady was widely anticipated, given that consumer price inflation figures released earlier this week came out in line with expectations and showed a moderation to 6.2% in April from 6.3% the previous month. The brief respite in consumer price inflation allowed Governor Lesetja Kganyago some breathing space within the current interest rate hiking cycle. Despite the Reserve Bank being close to the end of its hiking cycle, the pressure remains to the upside for further rate hikes, given the effect of the weakening currency on price stability.

The currency depreciated with renewed vigour since the start of the month, along with the currencies of other emerging markets. The drama surrounding the news of the imminent arrest of Finance Minister Gordhan merely exacerbated the weakness of the rand. The US Fed minutes released last night indicated that members of the Federal Open Market Committee saw June as an opportune time to consider hiking US interest rates for the second time in the current cycle. Financial markets previously assigned a very low probability of such an event and the repricing caused the dollar to strengthen and capital to flee emerging markets.

Kganyago had to weigh up economic growth considerations against upwards pressure on inflation, creating a policy dilemma. The slowdown in the domestic economy is pronounced and the local consumer remained highly indebted. The front loading of interest rate hikes will only stem growth further and potentially, push the economy into recession.

This entry was posted in African News, South Africa News. Bookmark the permalink.

Leave a Reply