In July the South African Reserve Bank maintained the slower pace of reserve accumulation, despite the strength of the rand, Nedbank’s economic unit said on Thursday.
”The Reserve Bank seems to have adopted a more cautious approach to reserve accumulation, perhaps to avoid unnecessary downward pressure on the rand,” the unit said.
Earlier, the central bank said the country’s net gold and foreign-exchange reserves had increased to $34,171-billion by July 31, from $33,762-billion at the end of June.
Gross reserves had risen to $35,004-billion by July 31 from $34,854-billion at the end of June. Net foreign currency holdings were at $31,338-billion from $31,137-billion.
”In the past, the pace of dollar purchases was relatively insensitive to movements in the currency,” Nedbank said.
However, given the rand’s weakness over the past few months and its implications for inflation, the Reserve Bank may have decided to slow down the pace of reserve accumulation.
In addition to general risk aversion, demand for South African assets will be affected by concerns relating to the outlook for the local economy and weaker commodity prices, Nedbank said.
The high interest rate, however, might attract some foreign capital as part of the carry trade.
”With the rand unlikely to appreciate significantly in the short term, the bank is likely to continue to accumulate reserves at a slower pace,” Nedbank said.
The slower pace of accumulation is probably the reason behind the local currency’s recent appreciation. This is good news for the inflation outlook, Nedbank said.
”There is now a solid case for keeping interest rates unchanged at the August meeting,” it said. — Sapa