Dr Chris Harmse is an economist at S3 Capital Financial Planners. Photo: File
Dr Chris Harmse is an economist at S3 Capital Financial Planners. Photo: File

Rand appreciates on positive economic prospects

By Philippa Larkin Time of article published May 24, 2021

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By Chris Harmse

DESPITE the sharp rise in South Africa’s inflation rate from 3.2 percent in March to 4.4 percent in April, the announcement by the SA Reserve Bank Governor Lesetja Kganyago that the Monetary Policy Committee (MPC) unanimously decided to keep the repo rate at 3.5 percent boosted the rand exchange rate.

The currency was also helped by the upward forecast of the Reserve Bank of South Africa’s expected economic growth rate for 2021 from 3.8 percent to 4.2 percent. The rand exchange rate traded Friday afternoon on R13.93 against the dollar, or 21 cents stronger than the R14.14 of the previous Friday.

Against the pound sterling the currency had advanced from R19.94 the previous week to R19.74 and against the euro the rand had appreciated by 19 cents to 16.98 at the close on Friday. It is the first time since July, 12, 2019 that the rand had traded again lower than R14 to the dollar.

The MPC in its statement argued that the economy will move stronger this year than anticipated earlier. According to the bank: “The stronger growth forecast for 2021 reflects better sectoral growth performances and more robust terms of trade in the first quarter of this year. Despite rising oil prices and a higher total import bill, commodity prices have risen to new highs, strengthening income gains to the economy. Household spending is expected to be healthy this year, in line with the easing of lockdown restrictions and low interest rates.”

Although the Banks Quarterly Projection Model (QPM) still indicates that the repo rate may increase by 25 basis points in each of the second and fourth quarters of 2021, the MPC still projects that the inflation rate will be 4.2 percent for 2021 (down from 4.3 percent projected in the previous statement) and 4.4% for both 2022 and 2003.

This means that the inflation rate is expected to remain below the mid-point range of the MPC inflation targets of between 3% and 5%. The market now discounts that there will be no increase in the repo rate for the rest of the year.

Equity markets across the world remains volatile and uncertain due to the increased numbers of Covd-19 infections and deaths across the world, as well as the continuous slow pace of vaccinations in most countries with the exception of the US and the UK.

US stocks dropped from the highs earlier in the week on the back of volatile trading in high risk assets such as Bitcoin. Markets also remain nervous on mulled recent economic readings and earnings reports.

The gold price on Friday afternoon was up by $25 (R349) on $1 876, than the previous Friday. Platinum however, continue to decline and the metal lost another $51 last week and traded Friday on $1 176 per ounce after losing $26 the previous week. .

Stock prices on the JSE remain weaker last week in a much volatile environment. The all share index traded down 1 997 points, or 2.8 percent, lower than the close the previous Friday. The Resources 10 index ended the week another 3.31 percent lower losing 6 percent over the past two weeks as the platinum price tumbles. Industrial shares recovered somewhat last week gaining 1.1%. Due to the stronger rand, financial shares gained 3percent .

This coming week the release of the leading Business Cycle Indicator on Tuesday will give some indication on business activity in the country. On Wednesday Statistics SA will announce the producer price index inflation number for April. In March the index jumped strongly by 5.2 percent. It is expected that it had increased further to 5.6 percent.

Globally, investors and analysts will concentrate on the release of the US Q2 GDP growth rate on Thursday. Germany’s gross domestic product economic growth rate, as well as its Business Climate Index for May will also be announced The US will publish various home sales data for April during the week, and of importance is durable goods orders for April that will be published on Thursday.

Dr Chris Harmse is an economist at S3 Capital Financial Planners.

*The views expressed here are not necessarily those of IOL or of title sites

BUSINESS REPORT

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