Rand has been valiant against rising global inflation, but interest rate hikes imminent

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The local bourse opened in positive territory on Tuesday with the financial sector leading the gains.

But analysts say it’s too early to tell if the bounce back will be sustained after the JSE suffered a 2% loss on Monday.

The recovery comes after investor jitters caused a sell-off in global markets on Monday, and Wall Street recorded a brutal day with the Nasdaq and S&P 500 closing down.

Zwelakhe Mnguni of Benguela Global Fund Managers says sharp losses in markets are a result of investor jitters about rising inflation and a worsening global economic outlook.

“Predominantly, it’s a function of the commodities sector readjusting to the threat of a possible recession in global markets.”

READ: Rand hit by floods, load shedding and signs of Covid comeback

“I think what we’ve seen in South Africa this morning followed suit in terms of being down compared to other JSE sectors. The main thing across the board is the development in the US yesterday where the Nasdaq was down and the S&P 500 was down. Those continue to spook markets. The market is a bit worried about the risk of a recession and that will be triggered by interest rates that are being raised to address the inflation problem” he said.

Locally, the Reserve Bank’s Monetary Policy Committee increased the lending rate to banks by 25 basis points at its last meeting and is expected to be more aggressive with a hike by another 50 basis points next week to tame consumer inflation, which has been driven higher by the oil price as a result of Russia’s invasion of Ukraine.

Ratings agency Moody’s said it expected inflation in South Africa to breach the Reserve Bank’s inflation target of 3% to 6%, and peak at 8% in 2022.

Viv Govender, portfolio manager at Rand Swiss, says the local market has been lucky to dodge increased inflation rates thus far.

We are going to be seeing inflation come up as well. We’ve been quite lucky, ... [but] with the rand as weak as it is, that’s going to hit quite badly, also with food inflation coming through because of the things happening in Ukraine and Russia.

“The war will bring a rise in food inflation. I think that’s going to be painful, especially for South Africans who spend more with food inflation,” Govendar said.

READ: Rand goes from dizzy heights to year lows as sentiment sours

The rand bounced back in overnight trade after recording a five-month low against the stronger US dollar on Monday. In early morning trade, the rand was at R16.13 to the dollar.


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