SA’s monetary policy stance under the microscope - Sarb

Daniel Mminele, Deputy governor of the Reserve Bank. (Who's who)
Daniel Mminele, Deputy governor of the Reserve Bank. (Who's who)

Cape Town – Amid the rand’s tumultuous start to the year, the SA Reserve Bank (Sarb) said that it will assess the appropriateness of the current monetary policy stance.

“The opening weeks of 2016 suggest that the conduct of monetary policy in South Africa will be further complicated,” said deputy governor Daniel Mminele, addressing members at the European Economics and Financial Centre in London on Tuesday.

“The currency remains a key source of risk for inflation in South Africa, despite some recent evidence of weaker pass-through,” he said.

“The monetary policy committee (MPC) will need to assess very carefully whether the current monetary policy stance remains appropriate,” he said.

The rand weakened by 6% in the first two weeks of 2016, at one point nearly reaching R18/$, after the currency fell by 25% in 2015.

Emerging market currencies like the rand have been hit hard by China’s waning demand for commodities, but it was eight days of madness on China’s stock markets this year that caused even more pain.

The Bloomberg Commodity Index has slumped 5% in 2016 with oil dropping below $30 for the first time in 12 years on Tuesday.

The rand on Thursday hovered around the R16.60/$ mark. “What we have been seeing this week is that local exporters have been providing the supply and helping to steady the rand after Sunday morning's circus,” independent treasury specialist to corporates, Adam Phillips of Umkhulu Consulting, said in a note on Thursday.

At the last MPC meeting, governor Lesetja Kganyago raised the interest rate to 6.25%. Analysts believe he will have to raise it by a further 50 basis points on January 28, when the MPC next meets.

“Rand depreciation remains a significant source of risk for the South African economy,” said Mminele. “While many peer emerging market currencies have also faced currency depreciation and volatility, the rand has, on average, underperformed.

“Since the beginning of last year, the rand has depreciated by 44% against the US dollar, 48% against the Yen, and 31% against the euro,” he said. “Furthermore, since the end of 2015, the rand has also lost ground against other emerging market currencies. It is clear that both external and internal developments have been driving the rand weaker.”

Watching inflation closely

Sarb is watching inflation closely, which was at 4.8% in November and which it sees exceeding the 3% to 6% target band in 2016.

Rand depreciation is a major factor underpinning inflationary pressures because they increase the domestic prices of imported goods, said Mminele.

“Commodity price movements also lead to a negative demand shock, which serves to offset inflationary pressures somewhat.”

He said the emerging market economy remains  vulnerable  to  global  economic  and  financial  markets  developments and currency pressures these uncertainties generate, as well as a number of domestic challenges to both growth and inflation outcomes.

“Utmost vigilance remains the order of the day, and risks will require close monitoring as we move deeper into 2016, and preparedness to take decisive action within our flexible inflation targeting framework if the key mandate of price and financial stability comes under threat.”

Reaction to NeneGate

Mminele revealed the impact Sarb felt when President Jacob Zuma replaced respected Finance minister Nhlanhla Nene in December with an unknown politician and then quickly fixed his mistake by bringing in Pravin Gordhan.

“Weaker growth prospects and perceptions around political events such as the cabinet reshuffle resulted in volatility in the local financial markets increasing sharply just before year-end,” he said.

“Markets initially reacted extremely negatively to the developments, with local assets experiencing severe selling pressure.

“The exchange rate of the rand touched what was then a historic low of R16.05 against the US dollar, the benchmark R186 government bond yield reached its highest level in seven years of 10.62% on 11 December, while the country’s five-year CDS spreads also widened substantially by 72 basis points relative to emerging market peers.

“Part of this selloff was later reversed, but the impact of this on investor sentiment, as well as local business and consumer confidence may linger. This is particularly true in the context of recent sovereign credit downgrades.”

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