Rate hike unlikely as low oil price offsets weak rand
THE rand looks set to continue its steep slide this year, but an even sharper plunge in global oil prices will dampen inflation and enable the Reserve Bank to avoid raising interest rates for much longer than anticipated.
Analysts believe that the volatile currency will break through the psychologically key level of R12 to the dollar in coming weeks, pressured by gains in the greenback as the Federal Reserve prepares to raise interest rates in the second half of the year.
It could slip as far as R12.60 to the dollar in the next few months, weakened also in part by lower prices for the commodities, which make up the bulk of SA’s exports, as well as the domestic challenges of ongoing power shortages and a looming public sector strike.
The currency already fell to R11.87 to the dollar last month, taking its depreciation against the greenback last year to 9.3%, and making it one of the worstperforming emerging-market currencies. Its losses against a trade weighted basket of currencies amounted to 3%.
“We don’t think it is over yet because dollar strength momentum has further to run. . . and will be the catalyst for a further sell-off in the rand,” said Sean McCalgan, market analyst at ETM Analytics. “It might not be a long period of runaway weakness but the rand has a tendency to overshoot.”
The rand was trading stronger at R11.51 to the dollar on Friday after US nonfarm payrolls figures suggested that the economy was not performing well enough to persuade the Federal Reserve to rush into raising interest rates.
“The rand could enjoy a temporary respite but won’t start screaming stronger — it will remain under severe pressure for a long period of time,” said Michael Keenan, South Africa strategist at Barclays Africa.
Apart from dollar strength, there are other triggers for depreciation, including the possibility of Greece leaving the European Union, Russia’s deepening financial crisis and the slowdown in China’s economic growth. The country’s large budget deficit and shortfall on the current account — the broadest measure of trade in goods and services — are also negative for the rand.
Emerging market assets are being hit by capital flight as yield differentials with developed market assets narrow, increasing their appeal to global investors.
In December, foreign investors sold R14-billion of domestic bonds and R8-billion of equities.
Nonetheless, the rand’s continued depreciation is unlikely to ignite inflation as it has in the past, because of the collapse in oil prices seen over the past few months.
Brent crude has lost 57% of its value since last June, dipping below the $50/barrel level for the first time since May 2009.
This has already put downward pressure on inflation, which analysts believe will descend to 4.5% — the middle of its official 3% to 6% target range — by April, from 5.8% in November. Barclays Africa predicts it will fall as low as 3.6%.
This is good news for consumers, who have already seen sharp cuts in domestic fuel prices, which account for nearly 6% of the basket of goods and services which make up the consumer price index.
It also means the Reserve Bank can avoid hiking interest rates, which would hurt SA’s anaemic pace of economic growth and job creation.
“It is difficult to see the Reserve Bank hiking policy rates aggressively this year with inflation likely to trend lower, especially in the first half,” said Keenan.
The Bank raised its repo rate by 75 basis points to 5.75% last year, in step with the international trend of moving back to positive “real” interest rates, which refers to the difference between interest rates and inflation. It has made clear that the rate hiking cycle will continue, but would prefer to make it as gentle as possible to avoid curbing growth, which is likely to have slowed to about 1.4% last year from 1.9% in 2013.
Elna Moolman, economist at MacQuarie Securities, expects two 25 basis-point interest rate increases in the second half of the year — but this is much less than markets had priced in before oil prices plunged. McCalgan predicts that the interest rate respite will be short-lived, given the rand’s weakness.
“The Reserve Bank will use inflation softness to hold back raising interest rates but we expect more rand weakness will force them into a hike. There is a risk it will become more neutral — inflation will lure the Bank into more complacency,” he said.