Rand without rate support? Beware!
Johannesburg - An interest rate increase is what’s needed to stem the rand’s worst run of quarterly declines on record, according to Bidvest Bank Ltd. That may not be immediately forthcoming.
The South African currency has weakened against the dollar for 12 consecutive quarters as the Federal Reserve prepares to raise borrowing costs and electricity shortages, low commodity prices and slow global growth 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 straight quarter, according to data compiled by Bloomberg. The South African Reserve Bank hasn’t raised rates since July.
“If we don’t keep up with the Fed hiking cycle, this currency is going to be taken to pieces,” Ion de Vleeschauwer, chief currency dealer at Johannesburg-based Bidvest, said by phone on March 30. “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.
South African Reserve Bank Governor Lesetja Kganyago left rates unchanged on March 26 for a fourth successive meeting even as the rand slumped to a 13-year low against the dollar on March 13. While policy won’t be dictated by the Fed, looming inflation threats from rising electricity tariffs and a new tax on gasoline may force the central bank to tighten policy, Kganyago said. The bank doesn’t have a target for the rand and has said it won’t increase borrowing costs to support the currency.
The rand gained 0.4 percent to 12.0817 per dollar as of 9am in Johannesburg, rebounding from a 4.9 percent slump in the first three months of the year. 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 Group Ltd.
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 may be too hawkish, according to Kim Silberman, an economist at Standard Bank Group Ltd., the nation’s biggest lender by assets.
“We maintain our view that rates will remain unchanged in 2015,” Silberman said in a report on March 27. “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 12.10 per dollar in the second quarter, Standard Bank said on March 24, compared with a previous mid-point forecast of 11.60. The second-quarter mid-point will probably be 12.35, compared with a previous forecast of 11.70.
With the possibility of the dollar reaching parity with the euro, there is a risk of the rand breaching 13.84 per dollar, the record low from 2001, according to Investec Bank Ltd. 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 on March 30. “The ending of quantitative easing in the US has contributed to the domestic currency running substantially weaker to its fair value.”