Rand gets impetus as Reserve Bank MPC proves to do the right thing
JOHANNESBURG – The cut of 100 basis points in the repo rate by the Monetary Policy Committee (MPC) on Thursday came for some as a surprise but overall most economists believed that it should have be the minimum.
Two schools of thought were divided on the issue. The one school believed that a too quick to sharp increase would put the rand exchange rate, bond markets and share prices under further pressure. The second school of thought believed that policy makers in South Africa do not have a choice and have to help the ailing economy.
The rand exchange rate had tumbled by more than 250 cents from R14.95 a dollar during the last week of December 2020 to a level of weaker than R17.60 a dollar earlier this week. In the same breath, bond rates also were in dire straits.
The R186 10-year bond rate had increased from 8.11 percent on 24 January to almost 10.8 percent on Wednesday. This is a loss of 35 percent. In the statement by the MPC, Governor Lesetja Kganyago stressed that despite the rise in risk for a weaker rand exchange rate and rising bond rates, the lower forecast for headline inflation on 4.4 percent and lower than the midpoint 4.5 percent created space for a sharp decrease in the repo rate.
After the decrease in the repo rate the rand indeed started to move stronger from levels of close to R17.50 a dollar to trade at R17.23 a dollar just after the close of the JSE. The R187 bond is now trading at blower levels around 10.57 percent.
Given the current lower international oil price of around $27 a barrel and the rand that is staring to stabilise at a lower level, it is expected that the price for diesel and petrol will decrease by around 100 cents at the beginning of April 2020.
This after the increased fuel levy of 25 cents per liter is deducted. Given the weight of 4 percent in the inflation basket such a cut in fuel prices will lead to a further decrease in the inflation rate by at least 0.4 percent. This may just leave the door open for yet another cut in the repo rate of at least 50 basis points.
Dr Chris Harmse is an economist and chief investment officer at Rebalance Fund Managers.