Rand Record Low will force SARB’s Hand to hike Interest Rates in September

The rand’s slump to a record low against the US Dollar has laid to rest any doubt traders were having about South African rate increases. Forward-rate agreements, used to speculate on interest rates, are pricing in at least a 25-basis points rate increase at each of the next two policy meetings. Before the rand’s fall to ZAR 14 per dollar, the contracts predicted only a 50% probability of an increase next month. As reported previously on Into SA’s eNEWS, South Africa’s currency tumbled the most since 2011 on Monday on concern lower prices for commodities, which account for more than half of the nation’s exports, will deepen as China’s economy slows.

The rand led currency declines amid a selloff of emerging-market assets, with Chinese shares sinking by the most since 2007 and raw material prices dropping to a 16-year low. “They’ll probably be forced to hike interest rates just to keep the rand from weakening even further,” Ion de Vleeschauwer, chief currency dealer at Bidvest Bank commented. “It’s not good news for the local market because it’s going to put a massive damper on economic growth.”

Forward-rate agreements starting in five months are now pricing in 50 basis points of rate hikes by the end of the year, compared with 35 basis points on August 21. The rand traded 1.8% weaker at ZAR 13.2027 per dollar as of 11:29 in Johannesburg on Monday after falling as much as 8.5% to ZAR 14.07 per dollar earlier.

h3. Repo Rate

The South African Reserve Bank (SARB) raised its benchmark Repo Rate, the interest rate for which commercial banks may refinance at SARB, by 25 basis points to 6% in July, the first policy move in a year, to help fight inflation which accelerated to 5% in last month. The Repo Rate subsequently dtermines the prime lending rate of the commercial banks, which now sits at 9.5%. The final two meetings of the Monetary Policy Committee of SARB will be held between 21 and 23 September (please note, this time from Monday until Wednesday) and from 17 to 19 November 2015.

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