Business

Rates steady in spite of rand's freefall

Lynley Donnelly

The Reserve Bank kept interest rates steady on Thursday, after a sharp overnight depreciation of the rand and amid darkening expectations.

The Reserve Bank kept interest rates steady on Thursday, after a sharp overnight depreciation of the rand and amid darkening expectations for the global economy. During the central bank’s two-day meeting to discuss interest rates, the rand took a hard hit, breaching R8.30 to the dollar.

The rapid depreciation, which has sparked concerns about a possible rise in inflation, came on the back of worsening forecasts from the debt-ridden United States and European Union markets. The Reserve Bank’s monetary policy committee left the repo rate unchanged at 5.5%, with prime remaining at 9%.

Bank governor Gill Marcus said the rand’s sudden depreciation posed an “upside risk” for the inflation outlook. But the currency’s volatility was influenced by the volatility of capital inflows into and out of emerging economies such as South Africa. Poor economic data from both the EU and the US has heightened risk aversion among foreign investors, who are moving their money to safe-haven investments such as US treasury bonds.

Marcus noted the rapid sell-off of local bonds and shares by foreign investors since the beginning of September. “These recent outflows, with increased risk aversion, have contributed to the high degree of volatility observed in the JSE all-share index, in domestic bond yields and in the exchange rate of the rand,” she said. But it remained to be seen how sustained the rand’s weakness would be as it was subject to the short-term vagaries of global risk aversion.

Nevertheless, the bank’s monetary policy committee was “concerned about the potential impact of the current global turmoil on domestic economic prospects”, she said, and was “ready to act appropriately should the need arise”.

Economist Dawie Roodt said global market fears could be allayed only once there was greater clarity about how EU policymakers and leaders aimed to address the region’s sovereign debt crisis.

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