Pressure to raise borrowing costs eased by rand’s rally

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Jaco Visser and Rene Vollgraaff

A rally in the rand, the best-performing major currency since the Reserve Bank’s interest rate increase in January, is easing pressure on governor Gill Marcus to keep raising borrowing costs.

The rand has strengthened 5.1 percent against the dollar since the central bank unexpectedly raised the repo rate by 50 basis points to 5.5 percent on January 29, following similar steps by India, Turkey and Indonesia. Forward-rate agreements used to lock in borrowing costs starting in nine months have dropped 62 basis points since reaching a five-year high on January 31, indicating investors are paring rate-increase expectations.

Marcus will consider whether to keep rates on hold at the monetary policy committee’s (MPC’s) meeting on March 27 as the rand’s rebound has cut the cost of imports, including oil, and lowered the price of food, such as wheat and maize.

The central bank saw inflation above its 6 percent target for four to five quarters, it said on Friday. The extent and duration of the breach was an important consideration when rates were increased, it said.

“The rand was trading significantly above 11” to the dollar at the previous MPC meeting, Dave Mohr at Old Mutual Wealth said. The rand’s appreciation meant the likelihood of another increase this month was “significantly smaller”.

Developing-nation assets came under pressure following the start of stimulus tapering by the Federal Reserve in January. Investors pulled out of emerging markets during political turmoil in Turkey, Thailand and Ukraine.

The rand was bid at R10.7727 to the dollar at 5pm yesterday, 5.77c weaker than on Friday.

Economic growth may be hindered by power cuts last week by Eskom, putting pressure on the MPC not to raise rates. – Bloomberg


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