Johannesburg - Data out of China scuppered the Reserve Bank’s plans, sending the rand hurtling to a 14-year low against the dollar in intraday trading on Friday.
The rand hit a session low of R12.680 to the dollar, its weakest since December 2001, according to Thomson Reuters data.
The trigger for the plunge, coming as it did a day after Reserve Bank governor Lesetja Kganyago announced a 25 basis point increase in the repo rate, was weaker-than-expected purchasing managers’ index (PMI) data from China and Europe.
Chinese manufacturing unexpectedly fell to the lowest in 15 months, with a preliminary PMI from Caixin Media and Markit Economics at 48.2 for this month, down from 49.4 the previous month.
Numbers below 50 indicate contraction.
The euro zone July preliminary manufacturing PMI was at 52.2 versus an expectation of 52.5, the services PMI came in at 53.8 against expectations of 54.2 and the composite PMI was 53.7 against forecasts of 54.
Though economists were straddling the fence prior to the monetary policy committee (MPC) decision, the latest rand weakness is creating consensus for higher rate hikes in September and November.
More rate hikes
Ricardo da Camara, an ETM Analytics market analyst, said the weakness exhibited by the rand on Friday was the market speaking to the Reserve Bank.
“The weakness today is the market telling the Reserve Bank that it is too little too late, it should have hiked the rate earlier,” he said.
He said ETM had been calling for higher interest rates and was convinced the repo rate could still be 100 basis points higher.
The rand’s decline was along with a basket of other commodity-reliant emerging market economies, including the Russian rouble, Brazil’s real and Colombian peso, all of which lost about 1 percent.
Commodity stocks also went down to 2009 lows.
Announcing the rate hike, Kganyago conceded the possibility of further hikes later as inflation encroached on the 6 percent limit the bank was trying to maintain.
He warned the central bank could not delay a rate hike as the local economy struggled with sluggish growth, a weaker rand and increasing inflation.
The decision means the repo rate, the interest charged by Reserve Bank to banks, has been hiked to 6 percent.
The prime lending rate, the interest charged by banks to customers, will jump to 9.5 percent.
Global drivers
Barclays Africa portfolio manager Mike Keenan said the rand’s reaction on Friday indicated that the MPC decision was partially priced into the market.
He said global sentiment and commodity factors were a bigger influence.
“Local factors continue to be secondary drivers of the rand,” he said, agreeing that the weaker rand would contribute to higher inflation.
Iquad Analytics portfolio manager Danie Strijdom said the rand activity on Friday was not the response the Reserve Bank had wanted and there was concern about the pressure commodities were under.