The Monetary Policy Committe (MPC) of the South African Reserve Bank (SARB) recognised the vulnerability of the current South African economy and let the Repo Rate unchanged at 5.5%, which translates to a continued prime lending rate of 9.0%. The current weak growth and the unresolved Mining Strikes contribute to a bleak outlook that did not outweigh the inflatory risks experienced due to increased fuel prices and a weak Rand.
The rand was already strengthening prior to the unchanged SARB decision yesterday and continued to firm after the time. The reason for this may be related to the market’s interpretation that not hiking is the better option when faced
with severe downside risks to growth. Foreign equity inflows have indeed improved since February and supported the Rand through its recovery phase, and this is a consideration based on the MPC outcome. More broadly though, the Rand has been gaining alongside its stronger Emerging Market (EM) peers for most of this week and much of its gains yesterday is likely to have been linked to this EM-positive trade.
The flip-side to this view is that SARB is lagging behind other EM central banks that have hiked more aggressively. SA continues to offer increasingly less attractive interest rates relative to its peers. This threatens a loss of capital inflows over time, especially now that foreign investors have begun to more closely scrutinise where they park their funds in a strike-ridden environment.
Thus although the South African Rand remains resilient in the short term, the aforementioned factors suggest that the currency remains fundamentally vulnerable, particularly should external conditions turn even less favourable.