Unchanged Interest Rates fail Relief for the Rand

On Thursday the Monetary Policy Committee (MPC) did almost unanimously decide to leave the Repo Rate in South Africa unchanged. It stands at 7.0%, which translates to an unchanged prime lending rate of 10.5% per annum. The Governor of the South African Reserve Bank (SARB), Lesetja Kanyago, defended the decision with current moderate pressure on the inflation, but to continue to be vigilant in this regard.

We regard this decision as wrong and we had – once again helplessly – watch the South African Rand (ZAR) coming under significant pressure, rising to 15.9900 to …. no, not the Euro, but the US Dollar (!) as an intra-day high. The move was however short-lived and the local currency drifted back down into the middle of its intra-day range. As has been mentioned before, rates need to rise further to assist in reducing the overall fragility of the ZAR.

The fact that rates were left on hold effectively leaves the ZAR as it was and detracts from the ZAR’s potential to stage a recovery through the months ahead. For the sake of clarity, the argument is not that higher interest rates equates to a stronger ZAR in such a direct mechanical manner. Rather, that higher interest rates tend to curb consumption and leveraged investment to the extent that it assists in narrowing the trade and the current account deficits. Furthermore, higher interest rates in and of themselves would be attractive to foreigners given the global search for yield and that the financial account of the balance of payments would enjoy some support. A stronger ZAR also tends to reflect an economy with less imbalances that might have been fostered in an environment where rates were appropriately higher.

There is no perceptible benefit to the productive sectors and SA exports as only a handful of sectors truly enjoy the benefits of a weaker ZAR. Whilst we remain generally bullish ZAR through the end of 2016 and first half of 2017, yesterday’s decision does not assist in supporting the ZAR. Heading into the weekend and there appears to be very little incentive to abandon the longer USD bias.

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