Rand and Eskom set to keep Bank in hike mood
Reserve Bank deputy governor Kuben Naidoo warned on Thursday of “two big risks” that could put its monetary policy committee (MPC) off ending the interest rate hiking cycle.
The two risks are heightened load-shedding affecting the inflation outlook and the rand, which has plummeted to levels last seen at the height of the pandemic in April 2020. On Thursday, it broke through R19/$ for the first time since April 2020. By midday it was trading at R20.77/€ and R23.91/£.
The rand has been losing ground against the dollar, the pound and the euro since the beginning of the year. Its descent gathered pace in recent days amid fears of even higher stages of load-shedding by Eskom. SA’s currency has lost 17% against the dollar over the past year.
Speaking at the PSG annual conference, Naidoo said the one side of the argument was that the Bank was near the end of the hiking cycle, having increased rates by a cumulative 425 basis points, “which has taken effect on the economy, constraining household incomes and’ in turn showing that the country s monetary policy is working”.
“However, there are two big risks. The first is [that] the rand will continue to perform weakly, notwithstanding a weaker dollar. But the rand will continue to perform weakly because of these idiosyncratic shocks. The second is because the production cost in SA is rising because of these energy outages and transport constraints and these would feed through into inflation. We would have to probably take further steps to bring down inflation and stabilise.”
A weak rand usually adds pressure to the inflation outlook as SA imports most of its fuel, which could lead the MPC to hike interest rates again when it meets in less than two weeks.
Naidoo said the main issue with the exchange rate was not necessarily the dollar, even if it was “certainly the strongest dollar that I’d seen in 30 years of looking at the data” but also SA-specific idiosyncratic shocks including persistent power outages and the country’s logistics constraints.
Naidoo said load-shedding
affected the rand in two ways. It forced SA to export and produce less, and also to import more.
In 2022, when coal prices peaked, SA shipped only 59million tonnes, the lowest shipment of coal out of Richards Bay in 30 years. “Even though it is not just load-shedding, this is a symptom of the fact that our economy is unable to export even during times of good commodity prices,” he said.
Because of these challenges, when the dollar started to turn in November 2022 the rand failed to benefit through the commodity exports channel, Naidoo said.
“This should have been good for the rand and should have helped the rest of us bring down inflation, but because of loadshedding we had a decoupling of the rand from other emerging market currencies and that shock has weighed down on the rand since then,” he said.
Naidoo said that while other emerging markets strengthened about 10%-15% since November 2022, the rand fell about 7%-8%.
“So we have had what is called an idiosyncratic SAspecific negative shock, and that negative shock has largely come from load-shedding,” he said.
Naidoo told delegates that even though the Bank did not target the rand-dollar exchange rate, it remained an important transmission mechanism of inflation globally and domestically and therefore an important signal of financial conditions.
“Tito [Mboweni, former Bank governor] used to famously say, ‘My job is not to ensure that a pint of beer in a pub in London is affordable to you. My job is to ensure that the pint of beer in the tavern in Soweto is at a fixed price’,” he said.
Naidoo said he used to believe a weaker exchange rate was almost always good but now he thought a weaker exchange rate tightened financial conditions. “That is bad for investment. And so we hiked rates by 50 basis points at the previous MPC,” he said.
“People say why are you doing this? To put the answer simply, first, we have a glide path by which we would like to see inflation come down and it has not met that glide path. It has been above the glide path. It is coming down too slowly for our liking, and that is why we took the more aggressive step of hiking rates by 50 basis points.”