Reserve Bank decides to play it safe in an uncertain world
South Africa joins peers in emerging markets by holding interest rates steady
● If there ever was a window for further cuts to interest rates because of low inflationary pressures, in order to stimulate sluggish emerging market economies, it now seems firmly shut.
This is as the dollar continues to strengthen in an environment where oil prices are rising because of geopolitical tensions being stoked, in the main, by US President Donald Trump.
This week the South African Reserve Bank — which has inflation well within its targeted range of between 3% and 6% — left rates unchanged as it fretted about factors over which it has no control that have triggered a sell-off in emerging-market assets.
Nigeria, Africa’s largest economy, also held its benchmark interest rate unchanged this week. Last week, Brazil left its benchmark rate untouched despite an expectation of a 25-basis-point cut. Angola and Kenya are expected to keep their key rates unchanged at their meetings this week.
South Africa has largely been stumped by a lack of structural reforms. Household consumption makes up about 60% of Africa’s second-largest economy, which has struggled to break free of the grip of low singledigit growth. Growth rates close to 4% — levels that economists believe would begin to eat into the unemployment crisis — were last seen almost a decade ago.
Nedbank chief economist Dennis Dykes said the central bank could be entering a prolonged period of holding interest rates at 6.5% — because of the oil price, rand depreciation and a tightening in global liquidity.
“All the things the Reserve Bank has been flagging have moved just a little bit in the wrong direction.”
Still, the rand has held up rather well against the stronger dollar when compared to its emerging market peers, weakening just under a percentage point over the past month. Of the 23 currencies tracked by Bloomberg against the world’s reserve currency, only four have strengthened in the period as uncertainty dogs the markets.
Months before Brazil’s elections, currency weakness and rising oil prices led truck drivers to strike this week, paralysing industry, agriculture and fuel supplies. The Brazilian real has weakened by 4.7% in the past month.
Turkey, where President Recep Tayyip Erdogan has moved to control monetary policy ahead of polls later this year, has had its currency plunge 13.6%.
The Russian rouble has been one emerging market currency that has bucked the trend and strengthened against the dollar. High oil prices have bolstered the economy.
Despite countries such as Russia, Angola and Nigeria experiencing a reprieve due to higher oil prices, the current environment signals an end to easing of monetary policy for emerging market economies.
The US Federal Reserve and Bank of England continue their monetary tightening cycle. The European Central Bank expects to start its cycle in the coming quarters.
“[Emerging market] interest rates are high relative to the near zero levels of their more developed counterparts,” said Siboniso Nxumalo, the joint head of global markets at Old Mutual Investment Group. “Turkey and Mexico, both of which are experiencing challenging economic environments, are in a rising rate cycle this year.”
Rising interest rates in developed climes set against holding positions by economies such as South Africa’s erode the allure of the currency carry trade. This is when an investor sells a currency with a relatively low interest rate and uses the funds to buy a currency yielding a higher interest rate. Given the structural woes of many emerging market countries, the carry trade has been a supporting pillar of their currencies.
Bank could be entering a prolonged period of holding interest rates at 6.5% Dennis Dykes
Nedbank chief economist