Strong rand ‘may benefit interest rates’

2010-11-09 14:40

The strength of the rand hurts the local manufacturing industry but may benefit interest rates, an economist has said.

“A strong rand hurts the local manufacturing sector because exported goods become more expensive while imported goods become cheaper: in both cases, the price of local goods is less competitive,” said Tendani Mantshimuli, consumer economist at Liberty Life.

Manufacturing is important to the economy as it contributes about 15 percent to the gross domestic product (GDP) and provides a significant number of employment opportunities.

Mantshimuli said poor export performance could not just be blamed on the exchange rate.

“Low economic growth in our trading partners, in particular Europe, our major trading partner, has also played a role.

“Until we see a sustained economic recovery and improved consumer demand in our trading partners, the performance of the local manufacturing sector will remain vulnerable,” she said.

The mining sector was also affected by a strong rand.

Although there had been a significant increase in commodity prices and the gold price was at historically high levels, local miners could not take advantage of this due to the rand’s strength, she said.

The currency’s strength should keep inflation low, as the cost of importing goods is lower.

“Low inflation means that interest rates can remain low for longer, which benefits consumers and particularly the poor, as it preserves saving and spending power,” Mantshimuli said.

This might lead to the SA Reserve Bank (SARB) cutting interest rates further at the Monetary Policy Committee’s next meeting, although Mantshimuli said the probability was low.

“The Reserve Bank’s leading indicator of economic growth has declined modestly, indicating weak growth ahead.”

The SARB and Treasury are concerned about the strength of the rand, she said, but doing something about it is tricky.

“According to the Governor of the Reserve Bank, they are assessing the effectiveness and appropriateness of measures taken by other countries and will then decide on measures that South Africa can take, if any.”

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