MONDAY, 1.00PM:
A NERVOUS Johannesburg Stock Exchange lost 3,28% of its value on opening on Monday morning, as market sentiment plunged with fears over the debilitating rand/dollar exchange rate and Friday’s indications that the Reserve Bank is scaling back its intervention in the foreign exchange market.
On Friday, the market was caught off guard when the Reserve Bank raised its penalty lending rate five basis points to 40,377%. Taken as a signal that the Bank had shifted its intervention in the market from using foreign exchange to making greater use of interest rates to fend off speculators, the repo rate shot up to 20,377% from 17% accordingly.
Reserve Bank governor Chris Stals at the weekend confirmed the Bank is pulling out of direct intervention in the foreign exchange market after using R26-billion to defend the rand in May. He said that, while the Bank previously intervened on the premise that the currency fall was temporary, three or four weeks down the line, he “can no longer say this is a temporary situation”.
The increased interest rate, which places prime lending rates at their highest levels in 13 years, signals a decline in domestic spending and growth, and a heavy blow to import-dependent industries. The growth-inhibiting knock-on effect of high interest rates will place the Bank under increasing domestic political and economic pressure.
A number of industry analysts as early as last week expressed concern that the rand is undervalued. ING Barings chief economist Kristina Quattek confirmed that if the rand is evaluated in terms of domestic fundamentals, it is significantly undervalued. However, Quattek continued, this will not stop the rand sliding further as the movements over the last few weeks were driven by international developments, and not domestic weakness.
Quattek questioned how long the Reserve Bank will be able to keep interest rates at such high levels in the face of unavoidable political and economic pressure.