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Stronger rand signals room for rate cut - economists

Jan 03 2018 15:03
Lameez Omarjee

Cape Town – The rand’s recent rally in the last weeks of December could keep inflation within the target band for the next few months and create room for monetary policy easing in 2018, according to economists.

Speaking to Fin24 by phone on Wednesday, head of Wits School of Economics and Business Science Professor Jannie Rossouw explained that the stronger rand could help bring down inflation, enabling the Reserve Bank to drop interest rates.

At the last meeting of the monetary policy committee in November 2017, it elected to keep rates on hold at 6.75%. At the time Reserve Bank governor Lesetja Kganyago said the outcomes of the ANC elective conference would impact the rand. Weak economic growth was also of concern, as was dwindling confidence levels.

The election of Cyril Ramaphosa as ANC president last month boosted the rand and in some way lifted all-round confidence levels. In December alone the rand gained more than 10% against the US dollar and the unit strengthened to levels last seen in 2015.

The rand returned to the level of about R12.30/$ it was at before former finance minister Pravin Gordhan and his deputy Mcebisi Jonas were axed in a midnight Cabinet reshuffle at the end of March, and on Tuesday it briefly traded at levels closer to R12.20/$. By 14:50 on Wednesday the unit was changing hands 0.9% firmer at R12.34/$ from an overnight close of R12.46.

“There are expectations of a higher growth rate in the year ahead,” said Rossouw. This could be higher than the  0.3% reported in 2016 and possibly also the number for 2017, he explained.

Higher economic growth means higher tax revenue for the government to possibly avert a fiscal cliff.

The rand has also performed better despite higher international oil prices, he noted. Petrol prices particularly were positively impacted, and provided relief to consumers. Petrol prices for 93 unleaded dropped from R14.49 per litre in December 2017 to R14.20/l in January 2018. For coastal regions, this was an improvement from R14.08/l to R13.79/l.

For unleaded 95 petrol the price improved from R14.76/l to R14.42/l; for coastal regions this improved from R14.27/l to R13.93/l.

Apart from rand strength, Ramaphosa’s win has appeared to provide a confidence boost, said Rossouw.

MMI economist Sanisha Packirisamy explained that the outcomes of the ANC conference could help lift consumer and business sentiment, but “sustainably higher” confidence levels depend on the ability of the new leadership to rebuild trust between government and the private sector.

The new leadership will also have to show commitment to fiscal discipline, address governance and financial problems at state-owned enterprises and deal with state capture, she explained.

However the two factions, Ramaphosa and Zuma, could be at loggerheads which may disrupt economic progress, she warned. An early recall for President Jacob Zuma could be viewed positively by the market, she said.

Rossouw called for the removal of Zuma as president of South Africa, if the country is going to make economic progress. “He is not capable to govern a modern economy,” said Rossouw.

“The big challenge for South Africa is to ensure free and fair elections. We must make sure it is not rigged and that it reflects the will of South Africans,” he said.

The Public Servants Association (PSA) in a statement also expressed the importance of government’s commitment to work hard in sustaining rand strength and an economic turnaround.

“The state of the rand and the economy will have an impact on the public service salary negotiations that are under way.

"As a representative of over 230 000 public servants, the PSA urges the government to use this opportunity and improve the economy as it will be both beneficial for the state as the employer and our members,” said PSA general manager Ivan Fredericks.  

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rand  |  government  |  sa economy  |  currencies  |  rates
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