Rand likely to remain volatile, says deputy SARB governor

Daniel Mminele
Daniel Mminele

Exchange rate forecasts for the rand remain widely dispersed, deputy governor of the SA Reserve Bank (SARB) Daniel Mminele said on Wednesday.

It is likely that the rand, along with other emerging market (EM) currencies, will remain volatile, he said at the Bloomberg FX'18 event in Johannesburg.

"As a consequence of the recent volatility, exchange rate forecasts remain widely dispersed," said Mminele.

Between the current quarter and the third quarter of 2019, the rand's exchange rate is expected to average R14.50/$ dollar, according to Bloomberg median forecasts.

"However, the difference between the most optimistic and the most pessimistic survey participants on the exchange rate forecast for the first quarter of 2019 is almost R3.00," said Mminele.

"What the future holds remains uncertain. The continued tightening in global financial conditions, a change in investor sentiment towards EMs, escalating trade conflicts and geo-political developments, together with some idiosyncratic risks, remain the key risks to the local currency."

He explained that such a wide dispersion around the median forecast over such a short forecast horizon is representative of the uncertainty that has become "an inherent part of our lives".

"This uncertainty adds significant complexity to the conduct of monetary policy, the most recent outcome of our monetary policy meeting and the finely balanced decision being a good case in point," said Mminele.

The SARB's MPC was divided about the recent decision to hike the repo rate by 25 basis points to 6.75%.

"Forward looking and medium-term oriented monetary policy within a flexible inflation targeting framework, requires us to look through volatility and to focus on macroeconomic fundamentals, as we stated in our most recent Monetary Policy Review," said Mminele.

"In this vein, we will continue to allow the exchange rate to absorb the initial shocks and focus our policy actions on addressing second-round price effects…it is important that policy decisions should not be informed by short-run market developments in either direction."

He added that in times like these, it becomes harder for some investors to ignore the risk of contagion in EMs.

"Despite this, our conversations with global and local investors reiterated the view that differentiation, informed by a top-down assessment of the overall economic environment in EMs, had increased over the years," said Mminele.

"This appears to suggest that investors were increasingly reassessing their investments in EMs on a selective basis."

According to Bloomberg, the rand depreciated by 28% from late February to early September, "peaking" at R15.70 to the dollar on September 4.

The rand also weakened on a trade-weighted basis, and its real effective exchange rate declined below its long-term average.

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