Rand edges up as traders await signals on MPC plans

THE RAND firmed against the dollar yesterday as traders waited for inflation and retail sales data today for pointers on the Reserve Bank’s interest rate decision due next week.

The rand was bid at R16.7665 to the dollar at 5pm yesterday from an intraday high of R16.5739 and an intraday low of R16.9270 and 1.82c stronger than the same time on Monday.

Deon Kohlmeyer, a currency strategist at Rand Merchant Bank, said next week’s meeting of the monetary policy committee (MPC) of the Reserve Bank would be crucial as it would give the market an insight on how the bank saw the world and what the local interest rate policy might be going forward.

“This week’s December CPI (consumer price index), as well as the retail sales numbers, may still point to a moderate 25 basis point hike next week instead of a dreaded 50 points that markets are pricing in.”

The rand fell more than 2 percent against the dollar on Friday, one of the weakest performances in a basket of emerging market currencies, reflecting worries about both the global and domestic economic outlook.

Daniel Mminele, the deputy governor of the Reserve Bank, said last week that the sharply weaker rand and a severe drought posed significant risks to the inflation outlook and had further complicated monetary policy. He said despite weak growth and the lack of demand pressures, inflation remained high, partly as a result of the rigid labour market.

Some analysts are predicting an interest rate hike at the Reserve Bank’s first policy meeting to curb inflation pressures caused by a sharp decline in the rand.

The MPC hiked rates by 50 basis points last year, balancing the need to contain price pressures without straining a struggling economy, which was expected to grow by 1.5 percent at most in 2015.

The rand has weakened by as much as 18 percent against the dollar since mid-December, as a result of the unexpected axing of Nhlanhla Nene as finance minister and on concerns about the global impact of weak growth in China.

This week’s CPI as well as the retail numbers may still point to a 25 basis point hike next week.

“Rand depreciation remains a significant source of risk for the South African economy. In general, risks to the inflation outlook for 2016 remain tilted to the upside and have recently deteriorated,” Mminele said in a speech in London.

First National Bank (FNB) economists Alex Smith and Mamello Matikinca said elevated inflation and currency weakness were likely to see the Reserve Bank hike more aggressively than previously thought, with an expected cumulative 100 basis points of rate hikes this year.

“All told, 2016 is likely to be South Africa’s most difficult year since the financial crisis,” they said.

They expect a CPI rise to a one-year high of 5.3 percent year on year for December from a prior 4.8 percent.

“This is expected to be due to a bounce in food and housing inflation. Beyond December, further inflation increases are expected, which may prompt the Reserve Bank to continue its hiking cycle later this month,” they said.

Kamilla Kaplan, an economist at Investec, said CPI was likely to have lifted to 5.1 percent year on year in December, averaging 4.6 percent for the year as a whole.

“In the month of December, the main contributions are expected to stem from housing and the transport categories. Specifically, December is a measurement month in which the prices of rentals, domestic workers’ wages and transport fares are surveyed.”

She said transport inflation was influenced by the relative changes in the petrol price.

Heading into this year, Kaplan said annual petrol price inflation was expected to increase, mainly on account of the statistical base effects.

Kaplan said the Department of Energy had announced a slight fuel drop of 3c a litre this month and estimated a hike of 14.8c a litre next month.

“Such statistical base factors will be responsible for much of the breach of the 3 percent to 6 percent target range in the first quarter, at 6.1 percent. We expect inflation to moderate thereafter, averaging 5.8 percent for the year.”