Xola Potelwa
AN interest rate increase is what is needed to stem the rand’s worst run of quarterly declines on record, according to Bidvest Bank. That may not be immediately forthcoming.
The currency has weakened against the dollar for 12 consecutive quarters as the Federal Reserve prepares to raise borrowing costs. Electricity shortages, low commodity prices and slow global growth also burden the domestic economy.
The rand’s slide is weighing on local bonds, with foreign investors selling more rand debt than they bought for a third consecutive quarter. The SA Reserve Bank has not raised rates since July.
“If we don’t keep up with the Fed hiking cycle, this currency is going to be taken to pieces,” said Ion de Vleeschauwer, chief currency dealer at Bidvest.
“If the Reserve Bank does not do anything to interest rates this year, then the big numbers of 13 and 14 may come into play,” he said.
The central bank’s governor Lesetja Kganyago left rates unchanged last week for a fourth successive meeting even as the rand slumped to a 13-year low against the dollar on March 13.
While policy would not be dictated by the Fed, looming inflation threats from rising electricity tariffs and a new tax on fuel might force the bank to tighten policy, Kganyago said.
The central bank does not have a target for the rand and has said it would not increase borrowing costs to support the currency.
The rand gained as much as 1.4 percent against the dollar yesterday, At 5pm, the rand was bid at R11.9934 to the dollar.
Yields on benchmark rand bonds due December 2026 dropped three basis points to 7.76 percent. The yield climbed 18 basis points in March to 7.8 percent, adding to a 50 basis point rise the previous month. Yields could rise to as high as 8.2 percent in the “near term”, according to Nedbank.
Too hawkish
Forward-rate agreements predict 33 basis points of rate increases in July, with another 31 basis points by the central bank’s final policy meeting of the year in November. That might be too hawkish, according to Kim Silberman, an economist at Standard Bank. “We maintain our view that rates will remain unchanged in 2015.”
“This is based on our expectation that inflation slows through 2016, from a temporary breach of the target in the first quarter and a peak in February to average 5.9 percent for the year, in line with the central bank’s forecast,” she said.
The central bank predicts the consumer inflation rate will average 4.8 percent this year. Consumer prices rose 3.9 percent in February from a year earlier, remaining inside the bank’s target band for a sixth month.
The rand will probably trade in a range with a mid-point of R12.10 per dollar in the second quarter, Standard Bank said last week, compared with a previous mid-point forecast of R11.60. The second-quarter mid-point will probably be R12.35, compared with a previous forecast of R11.70.
With the possibility of the dollar reaching parity with the euro, there is a risk of the rand breaching R13.84 per dollar, the record low from 2001, according to Investec Bank.
Speculation that the Fed will start raising rates in the second half is drawing funds to the dollar and away from higher-yielding assets including rand bonds.
“The domestic currency is at risk of further weakness,” Annabel Bishop, an economist at Investec, said in a client note. “The ending of quantitative easing in the US has contributed to the domestic currency running substantially weaker to its fair value.” – Bloomberg