Reserve Bank won’t rescue free-falling rand
THE RAND fell to new lows yesterday, breaching R21 to the British pound and coming close to R14 against the US dollar, but the SA Reserve Bank would not act to try to arrest the free fall. The Reserve Bank had no intention of bolstering the currency, given the beneficial impact of a falling rand on inflation and the benefits it provided to the economy, governor Lesetja Kganyago said.
The currency’s decline is a result of the Chinese slowdown and expected monetary policy normalisation in the US, Kganyago said over the weekend on the sidelines of a G-20 meeting of central bank governors and finance ministers in Turkey’s capital, Ankara.
“There is no amount of central bank involvement that would do anything to stop a currency from aligning to what the macroeconomic fundamentals are,” Kganyago said. “We have had a shock to our commodity prices and the currency has depreciated. It just provided a cushion to our export sector.”
The rand tumbled more than 8 percent since the start of last month on concern that prices for commodities, which account for more than half of the nation’s exports, would plunge further as China’s economy slows.
While the bank had repeatedly cited a weak currency as the biggest risk to consumer prices, Kganyago played down the feed-through impact, citing the decline in oil prices.
“What we have seen is that with every episode of the rand’s depreciation, the passthrough from the depreciation of the currency into the inflation rate had been muted and had been lower,” he said.
The rand’s depreciation “is also accompanied by the decline in the oil price, and the decline in the oil price is disinflationary”.
The currency weakened less than 0.1 percent to 13.8588 per dollar as of 7.42am yesterday, taking its drop since the start of the year to 17 percent.
The Reserve Bank raised its benchmark repurchase rate by 25 basis points to 6 percent in July, the first policy move in a year, to help fight inflation that accelerated to 5 percent in July.
Kganyago said last month that the current tightening cycle would be moderate.
The oil price decline “gives a fillip” to the South African economy through lower energy bills, as South Africa imports about 70 percent of its crude oil requirements, the governor said.
The bank may have to cut its economic growth forecast for this year after the economy contracted by an annualised 1.3 percent in the second quarter, he said.
The monetary policy committee said in July that the economy would grow 2 percent this year and 2.1 percent next year. – Bloomberg