SARB probes rand rally effects

SARB will have to assess the sustainability of the rally to see if it changes the nation’s inflation trajectory.

Johannesburg - South Africa’s central bank welcomes the recent strength in the rand and it will have to assess the sustainability of the rally to see if it changes the nation’s inflation trajectory, Deputy Governor Daniel Mminele said.

South Africa’s currency was the best performer against the dollar, after Brazil’s real, among 24 emerging-market currencies in June. The rand notched up its best month since March as global central banks signaled readiness to support their economies and stem the fall-out from the UK’s vote last week to leave the European Union.

“It’s obviously welcome because we have previously identified the rand as one of the most significant upside risks to inflation,” Mminele said in an interview at Bloomberg’s Johannesburg offices on Friday. “What you don’t want to do is be tempted to fall into that trap of overreacting to the most-recent data. The issue must be around longer-term trends, and not an overreaction to short-run market movements.”

The Reserve Bank’s Monetary Policy Committee is due to announce its next interest-rate decision in less than three weeks after raising the benchmark repurchase rate by 125 basis points since last July to 7 percent as it sought to steer inflation back into its 3 percent to 6 percent target band. Price growth slowed to 6.1 percent in May, the lowest rate this year, partly due to the rand’s 5 percent gain against the dollar since the start of 2016 after it lost 25 percent against the US currency last year.

“What we are involved in, given the particular situation South Africa finds itself in at the moment, is a situation where we are gradually removing or lessening accommodation as opposed to a situation where we are outright tightening policy,” Mminele said.

S&P Global Ratings kept South Africa’s credit assessment at BBB-, one level above junk, on June 3, warning that it could cut the nation’s debt evaluation if the economy doesn’t recover. Fitch Ratings also maintained its outlook with Moody’s Investors Service keeping Africa’s most-industrialised nation at two levels above non-investment grade. With S&P scheduled to announce its next rating assessment in December, risks of a downgrade are still there, Mminele said.

“The fact that we escaped this in June certainly can’t allow any level of complacency,” he said. “We’ve got our work cut out and six months can melt away very quickly.”

While the rand’s volatility is the highest among 24 emerging market currencies tracked by Bloomberg, it’s important to let the market learn to cope with periods of volatility and the Reserve Bank would only step in if a lack of liquidity threatened to distort prices, Mminele said.

“We monitor conditions anyway every single day,” he said. If stress indicators moved in a particular way, the bank would “invoke whatever strategies and contingency plans we have in place, but it hasn’t been necessary,” he said.

BLOOMBERG