The South African monetary policy committee meets next week in what could be a disastrous start to the year for consumers. Nomura emerging market economist Peter Attard Montalto says given all that’s already happened in January, a 100 basis point isn’t inconceivable, but he expects nothing less than 50bp. Investec’s Brian Kantor has taken a difference approach, calling on the committee to recognise the facts, saying that there’s no good reason to believe the relationship between interest rates and the rand will be any more predictable than last year. What he can assure them of though is that higher interest rates have already slowed the economy and will slow it further, making Finance Minister Pravin Gordhan’s and every citizen of South Africa’s jobs a lot harder. Yet again some fantastic analysis. – Stuart Lowman
By Brian Kantor*
The members of the Monetary Policy Committee (MPC) of the Reserve Bank will be even more perturbed about the behaviour of the rand than the rest of us. However they have had (and will have) as little influence over its direction as you or me. The link between short term interest rates that they control and the USD/ZAR exchange rate is shown in the chart below. As may be seen, they began a rate hiking cycle in January 2014 and since then, the higher the rates, the weaker the rand has been. It is very hard to argue that the rand would have been any weaker than it now is had interest rates remained on hold over this period.