Interest Rates might rise if weak Rand affects Economy

The South African Reserve Bank (SARB) is ready to adjust monetary policy if a slump in the rand filters through to the economy and fuels inflation, said Governor Lesetja Kganyago: “What is of concern is whether the depreciation of the rand feeds itself into domestic inflation,” Kganyago said in an interview with Bloomberg TV in Lima, Peru. “If we think that it would feed itself into second-round effects, then we would be left with no choice, policy would have to adjust to deal with the consequences,” he said.

While inflation of 4.6% in August was within the 3% to 6% target range, the bank predicts the rate will break the upper limit next year. That will create a policy dilemma in an economy showing signs of a slowdown. Kganyago, who turned 50 on Wednesday, raised the benchmark interest rate twice since July last year to 6%, then left it unchanged in September to support economic growth. The biggest risk to inflation is coming from the rand, which slumped 14% against the dollar this year to reach a record low of R14.1599 on September 29. Former central bank Governor Tito Mboweni said in an interview in London that the Reserve Bank is in a policy “bind” and will need to raise interest rates at some point despite a slowing economy.

“They’ve been boxed in very badly,” Mboweni said. “They will have to bite the bullet at some stage.”

h3. Policy Clarity

An environment of global economic uncertainties before the first interest-rate increase by the US Federal Reserve since 2006 will not end after the Fed makes a move, said Kganyago. At subsequent meetings of the US Federal Open Market Committee (FOMC), “everyone will keep asking, will they continue on it or will they hold,” he said. “There will always be another FOMC meeting and another FOMC meeting.” South African exporters aren’t seeing the full gains of a weaker rand because of slower global demand, he said. “Theoretically it should benefit exporters, but for exporters to take advantage of that, there has to be global demand.”

h3. Trade Deficit

South Africa’s current-account deficit may “creep up a little bit”, but “nowhere close” to the high levels reached in the past. The gap on the current account, the broadest measure of trade in goods and services, narrowed to 3.1% of gross domestic product in the three months through June.

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