Both Tito watchers and Ben watchers are expecting a change in interest rates. But while South African consumers are expecting another hike, United States consumers are expecting another cut. As a result, South Africa could attract interest from speculators wanting to take advantage of our higher rates, and could help to strengthen the rand.
But economists disagreed on the question of whether a stronger rand would help the economy.
The Reserve Bank is almost certain to raise interest rates at its meeting next week, said market commentators, following the release of stronger-than-expected economic growth figures and worse-than-expected inflation data. A further rate hike in February may also be possible.
On Wednesday headline consumer inflation (CPI) for October was reported to be 7,9% year-on-year, while CPIX, which strips out the effect of mortgage bonds, was posted at 7,3% year-on-year. The market had expected CPI to reach 7,7% and CPIX to reach 7,3%.
Meanwhile, the economy is still growing strongly, despite a succession of rate hikes. Annualised Âquarter-on-quarter growth in real GDP reached 4,7% for the third quarter of this year, which ended in September.
Jeff Gable, head of research at Absa Capital, said the inflation problem was broader than the food and fuel-price hikes. Almost three-quarters of the basket of goods that make up CPIX is rising at 6% or more a year, and CPIX could reach 8% in future. Absa expects a 50 basis point rate hike in December and another of the same magnitude in February.
“It [the MPC] is going to be faced with the unenviable task of communicating that inflation is higher than it had expected, that the peak in inflation is going to be considerably higher than it had warned just two months ago, and that the likelihood has risen that inflation will remain above the CPIX target for longer,” Absa Capital summed up in its newsletter.
Gable said a currency movement, which would be large enough to fight inflation, would have to be “larger than what most people expect”. Even a 50c movement in the rand would not make a difference, given that the currency has already weakened by that much in the last week and a half.
Dawie Roodt, an economist with the Efficient Group, said a widening differential would certainly lead to capital inflows, which in turn would help the currency to appreciate “and that’s what they [the Reserve Bank] are trying to do”. A stronger currency would fight inflation, he said.
But Stanlib economist Kevin Lings said a stronger rand was likely to have a negative impact on the economy, although it would fight inflation. The manufacturing sector was already under pressure and exporters would struggle if the currency appreciated.
Foreign money attracted by the rate differential might not necessarily stay, as equity markets slowed down and companies struggled to maintain good results in a slowing economy.