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Johannesburg – Markets have priced in the monetary policy committee’s (MPC's) decision to keep the interest rate on hold, which is why the rand’s recent movements have been attributable to political movements rather than the rates announcement.
This is according to Stanlib chief economist Kevin Lings, who spoke to Fin24 ahead of the interest rate announcement.
He explained that the rand's strengthening to levels of between R12.30 and R12.40 to the dollar - observed a week ago - was mainly attributable to a drop in inflation. This was followed by increased debate that the South African Reserve Bank (SARB) might consider an interest rate cut, as it has become more “comfortable” with inflation. But that debate has “completely disappeared” due to recent political events, said Lings.
SARB will most likely wait for more clarity in terms of where the rand will settle and what the recent developments would mean for credit ratings, he said. “Right now, there are too many unknowns for the Reserve Bank.”
The rand was trading at R12.90/$ ahead of the rates announcement.
Lings added that rand volatility was driven by political events linked to a possible Cabinet reshuffle, with Finance Minister Pravin Gordhan’s position at risk.
READ: Zuma in a corner over Cabinet reshuffle – economist
However, Bloomberg reported that about 12 ministers are considering resigning their positions and then fighting for the president’s removal if Gordhan were to be ousted.
The officials would keep their seats in Parliament and possibly support or abstain from a vote of no confidence in the president if it’s called by the opposition or by members of the African National Congress, sources told Bloomberg.
Reuters also reported that there could be a possible deal, with the president agreeing to finish his term a year early in exchange for Gordhan's removal.
However, Lings said that markets have become “shell shocked” with news doing the rounds and would only react to what Zuma actually does. “The market would react to an event rather than to suggestions of what might happen,” he said.
The rand was the best performing emerging market currency as at Friday, March 24. This was ahead of Zuma’s decision to order Gordhan and his deputy Mcebisi Jonas to return from their investor roadshow in the UK and US.
ALSO READ: Rand plummets as Presidency cans Gordhan roadshow
The rand subsequently weakened 4%. Lings added that despite its volatility, the currency was up 5.7% against the US dollar year-to-date and gained 1% against the dollar in the month.
“The rand is now the seventh best performing emerging market currency year-to-date,” he added.
After the MPC's announcement that the interest rate would remain on hold at 7%, the rand traded at R12.89/$ at 15:23.
During his address, Reserve Bank governor Lesetja Kganyago explained that “recent heightened domestic political uncertainty” reversed the exchange rate gains. He added that the risk of further rand weakening would impact the inflation outlook.
Since the previous MPC meeting, the rand had appreciated by 3.9% against the dollar and 4% against the euro.
“The rand is likely to react further to unfolding developments until a greater degree of certainty and confidence is restored,” he said.
By 15:45 the rand was firmer at R12.83/$.
