May 25, 2023
South Africa Rate Hike Fails to Stop Rand Slumping to Record Low
(Bloomberg) -- South Africa’s rand plunged to a record low as another jumbo rate hike by the country’s central bank raised concerns about the outlook for economic growth.
The South African Reserve Bank increased its policy rate by 50 basis points to 8.25%, the highest since the financial crisis, saying restrictive policy is necessary to curb inflation even as it warned that more rand weakness was likely. The move will add strain to an economy that’s forecast to grow by just 0.3% this year in the face of unprecedented electricity shortages.
The rand slumped as much as 2.6% to 19.7640 per dollar, breaching the record-weak level set last week in the wake of a diplomatic row with the US over South Africa’s ties with Russia. The government bond yield curve steepened, with the rate on 2044 securities rising 11 basis points as traders priced in a growth slowdown.
“The health of the local economy is now the primary concern,” said Brendan McKenna, an emerging-markets strategist at Wells Fargo Securities in New York. “It’s difficult to make a really compelling case to deploy capital toward South Africa and the rand at the moment. The rand has been an EM currency that has underperformed for most of this year, and given the commentary from the SARB today, that underperformance is likely to continue.”
Bloomberg’s forecast model based on prices of options to buy and sell the rand shows a 53% chance of the currency breaching 20 per dollar within the next week. That compares with a probability of just 6.8% before Thursday’s rate decision.
All of the monetary policy committee’s five members voted for the half-point increase, the first such unanimous decision since September 2021. There have been a cumulative 475 basis points of interest-rate hikes since November 2021, the most aggressive tightening cycle in at least two decades.
“The rand should strengthen after an interest rate hike, but given the poor reaction in the currency, the market seems to think that this is a potential policy mistake,” said Michelle Wohlberg, a fixed-income analyst at Rand Merchant Bank in Johannesburg. “The yield curve has steepened aggressively post the rate hike as fiscal fears start playing in investors’ minds on the back of poor growth prospects.”
The country’s benchmark stock index gained 0.8%, buoyed by companies that benefit from a weaker rand. Luxury retailer Richemont climbed 4.2%, while diversified global miner Anglo American Plc was up 2.4%.
--With assistance from Colleen Goko and Monique Vanek.
©2023 Bloomberg L.P.