The South African Reserve Bank’s Monetary Policy Committee announced on Thursday that it would raise its key repo rate by 50 basis points, a move intended to safeguard the country’s struggling economy. However, despite this decision, the rand still fell to a new record low against the dollar.
The statement released by the Monetary Policy Committee struck a tone of concern about persistent price pressures and the ongoing struggles faced by South Africa’s currency. According to the statement, tighter global financial conditions create added risk for economies like South Africa, which rely on foreign capital, and generally lead to weaker currencies.
Building on this sentiment, Governor Lesetja Kganyago admitted in a subsequent Q&A session with the media that the exchange rate was one factor that is outside central banks’ control. He argued that the bank could not stop the currency from depreciating, pointing to the 1998 crisis when attempts to intervene in the currency market had limited success.
Despite the decision to raise interest rates, traders appeared skeptical that this would stem the decline in the rand’s value. Prior to the announcement, the rand had been steadily sinking, matching its previous record low of 19.51 against the US dollar before rallying slightly to 19.45. However, following the governor’s comments, the currency went into free fall, ultimately reaching a new record low.
In sum, while the 50 basis point rate hike may have been intended to stabilize South Africa’s economy, traders and investors remain unconvinced of its potential impact on the rand’s value. With larger domestic and external financing needs, upside inflation risks, and ongoing load shedding, further currency weakness appears to be expected.
