Rand worst performing currency
2006-08-29
The weakness in the rand is adding to woes that the Reserve Bank is expected to hike interest rates even further at its next MPC meeting next month.
Cape Town - Reasons to hike rates are becoming more compelling, with the weakness in the rand adding to woes that the South African Reserve Bank is expected to tighten monetary policy even further when its MPC meets next month.
Since the beginning of the year, the rand already lost 11.5% of its value against the dollar.
Late on Monday, the unit stayed close to a five-week low against the dollar at R7.1755/$.
The downtrend was expected to continue ahead of the inflation data due to be released on Wednesday and Thursday. The rand earlier on Monday slipped to R7.21/$ - its weakest level since July 19, according to Reuters data.
Garrow cautions that the risk contained in hiking rates is a fragile one.
"On the one hand, the central bank must slow consumption expenditure sufficiently to reduce the imbalance on South Africa's external accounts.
"On the other hand, hiking interest rates suggests slower economic growth, and an erosion in the financing of the current account deficit."
Garrow says non-residents who had been prolific purchasers of domestic equities have stalled their interest, interest which had grown in anticipation of brighter GDP growth prospects.
"The problem this creates for the current account is that capital financing for its deficit (-6.1% of GDP in H1 2006) is withdrawn.
"A current account deficit this large adds momentum to speculation that the rand may weaken further, fanning inflationary pressures and adding to calls for rates to be hiked."
However, foreign investors who are lightening their equity portfolios, as part of the risk aversion towards emerging markets, should be reminded that two vital stabilisers to currency volatility are firmly in place, says Garrow.
"The central bank has turned the deficit in reserves around, where the international liquidity position has been reported at some $20bn, a far cry from the forward book of $23bn which existed at the peak of the crisis in global markets in 1998.
"Another important element to the stability in the local currency is the inflation targeting mechanism, with CPIX - due for release on Wednesday - expected to be within its target zone for thirty-five consecutive months," says Garrow.
Garrow expects CPIX to come in at 4.4% in July, from 4.8% reported the previous month. "But, this may not be enough to thwart expectations that the Bank could hike rates by 50 basis points at each of its MPC meetings in October and December."
Garrow says it is significant that the Bank has preemptively taken steps to slow consumption expenditure and improve the current account, rather than to respond belatedly to inflation which threatens to breach the upper end of the inflation target range.
But, the risk is a fragile one - that too much monetary tightening may threaten GDP growth and prompt some foreign disinvestment from equities.
News24/Finance24