Johannesburg - The rand weakened to a fresh 14-year low on Thursday after the Reserve Bank wrongly second-guessed the intentions of the Federal Reserve Bank to announce the start of monetary policy tightening in September.
The monetary policy committee (MPC) of the Reserve Bank hiked the repo rate by 25 basis points to 6 percent last week, partly in anticipation of an early interest rate increase by the Fed.
Now the Fed is expected to start raising in September.
Unfortunately by then, when the Reserve Bank moves in response, it will be off a higher base as a result of its miscalculation of the market.
The US expanded at a faster pace in the second quarter, with gross domestic product rising 2.3 percent, while the labour market also showed signs of improving.
“It certainly builds the case for that September hike to come through,” said Mohammed Nalla, the head of strategic research at Nedbank Group.
Hiking cycle
“The hiking cycle will probably be a lot shallower than previous hiking cycles, but it will still be a hiking cycle. That will predispose the likes of the rand and other emerging market currencies and economies to significant weakness.”
The rand fell in tandem with currencies of developing nations from Brazil to India as the greenback headed for its best month since January.
The rand weakened as much as 1.7 percent to R12.754 a dollar before paring losses.
At 5pm, it was bid at R12.7389 against the greenback.
The rand, which has dropped 9 percent this year and 4.3 percent this month, fell to a record intraday low of R13.84 in December 2001.
Announcing the rate rise, the MPC said: “The rand continues to be vulnerable to the ebbs and flows of global risk perceptions and associated capital flows, particularly in response to anticipated changes to US monetary policy. At the same time, there is a great deal of uncertainty regarding the extent to which US monetary policy normalisation has been priced into the rand.”
It said the rand therefore remained an upside risk to the inflation outlook. The rate hike was seen by some economists as the Reserve Bank trying to front run the market, particularly at a time when several central banks were cutting their interest rates.
The critics said the hike was ostensibly to protect the rand against the dollar, otherwise there was no need for it.
Isaac Matshego, an economist at Nedbank, said yesterday that the rand was down by almost 30c against the dollar because of the anticipated Fed hike in September. He repeated the statement made by him and Dennis Dyke, Nedbank’s chief economist, that the MPC’s decision was disappointing in logic and probable effect.
They said risk factors for inflation stressed at the May meeting had mostly abated over the past two months, with Eskom’s tariff application being rejected and the oil price failing in both dollar and rand terms.
Global reasons
The rand was weak over this period but this was for largely global reasons, with China and Greece both increasing risk aversion.
“Any number of interest rate hikes would do nothing to protect against such moves. By moving now, the Reserve Bank will almost certainly have to move again when the US actually starts tightening policy, but now it will be off a higher base and create more damage to the already weak economy.”
Russell Lamberti, the chief strategist at ETM Analytics, said the Reserve Bank’s mistake was not hiking too early, but far too late. It was now playing catch-up as emerging market risk escalated and the dollar bull market and commodity bear markets placed the rand in trouble.
Econometrix said on Wednesday in its economic outlook for the third quarter that the MPC statement did not provide any conviction as to why the Reserve Bank had decided to lift rates this month as opposed to later in the year or for that matter back in May.
BUSINESS REPORT