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Stronger rand still vulnerable - Kganyago

Sep 22 2016 18:44
Lameez Omarjee

Johannesburg – The South African Reserve Bank’s (Sarb) inflationary outlook has improved, and one of the reasons underpinning this is the stronger rand. However, governor Lesetja Kganyago said the currency was still at risk.

Following the Monetary Policy Committee (MPC) meeting in Pretoria, Kganyago said that the rate would remain at 7%, partly because of the strengthening rand. He explained that the rand had appreciated due to the unchanged US monetary policy.

READ: Sarb holds interest rates steady

“The rand remains vulnerable to future changes in the US monetary stance, domestic political developments as well as a risk of a possible ratings downgrade,” he warned. Kganyago said that the positive factors impacting the rand were temporary.

He added that the MPC committee could not ignore what happens in the US economy when making decisions. The Fed’s decisions impact the global economy, of which the South African economy is part, he explained.

The rand was positively impacted by the stronger GDP growth outcome and the narrowing of the current account deficit. The Sarb had revised the growth outlook from 0% to 0.4%. The current account  deficit narrowed from 5.3% in the first quarter to 3.1% in the second quarter.

In a statement Arthur Kamp, economist at Sanlam Investment, explained that the stronger rand helped “anchor” the inflation outlook, but that possible shocks to the exchange rate could cause an upset. These shocks are linked to the “likely pace and timing” of US interest rate hikes, along with domestic economic policy uncertainty, he explained.

“The worry is that a renewed bout of rand weakness could re-ignite inflation expectations and ultimately lift inflation, which is already just below the upper limit of the bank’s target range,” said Kamp.

The rand exchange rate has been affected by global events as well as domestic fundamentals and political developments, said Kganyago.  Since the last MPC meeting, the rand traded at R14.73 and R13.28 against the US dollar. It has appreciated by 6.3% against the US dollar, 4.3% against the Euro and 5.2% on a trade weighted basis, he said.

Following the rates announcement, Fin24 reported that the rand was trading at R13.52 to the dollar.

ALSO READ: Rates unchanged as Sarb lifts growth forecast - as it happened

The inflationary outlook is expected to remain within the targeted range, next year, provided that currency weakness, among other things, does not return, explained Kamp. In his speech, Kganyago said that the upside risk to inflation from the exchange rate had moderated.

He also said that the other risk to inflation was linked to food prices, which is expected to improve with rainfall, following the drought. In a statement, Rian le Roux, chief economist at Old Mutual Investments said that with the rand being firm, demand weak and grain prices falling, inflation is expected to ease in 2017.

Kganyago said that the MPC may have reached the end of the hiking cycle, but that these decisions depended on the outlook of the economy and global financial markets which remained uncertain.

Read Fin24's top stories trending on Twitter:

sarb  |  inflation  |  interest rate  |  sa economy  |  rand
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