The South African rand is facing pressure from a global realignment of currencies that is beyond the control of the central bank, Governor Lesetja Kganyago said on Thursday. Speaking at a webinar, Kganyago said his main concern was inflation and the impact of the exchange rate on price stability. He said the bank was committed to keeping inflation within its target range of 3%-6%.
South Africa’s consumer inflation rose slightly to 4.8% year-on-year in August from 4.7% in July, but remained within the bank’s comfort zone3. However, Kganyago warned that risks to the inflation outlook included food prices, oil prices and currency movements. The rand has weakened by more than 10% against the US dollar since June, as investors shifted their preferences to safer assets amid rising global uncertainty and volatility. The rand is also vulnerable to domestic factors such as low economic growth, high debt and political instability.
Kganyago said the bank had no target for the exchange rate and would not intervene to support the currency, unless there were signs of disorderly market conditions. He said the bank’s policy stance was appropriate and data-dependent, and that it would continue to monitor the developments closely. The bank has cut its benchmark repo rate by 300 basis points since March 2020 to cushion the economy from the impact of the COVID-19 pandemic. The rate currently stands at 3.5%, the lowest level in more than 50 years.
The bank expects the economy to grow by 4.2% this year, after contracting by 7% in 2020. However, it has warned that the recovery is uneven and fragile, and that structural reforms are needed to boost growth potential and confidence. Analysts have mixed views on the outlook for the rand and interest rates. Some expect the rand to recover as commodity prices remain high and global risk appetite improves. Others foresee further weakness as the US Federal Reserve prepares to taper its stimulus and raise interest rates. Some analysts also expect the bank to start hiking rates in November or early next year, as inflation pressures mount and the output gap narrows. Others predict that the bank will keep rates on hold until late next year or beyond, as growth remains subdued and inflation expectations anchored.
The rand is one of the most traded currencies in Africa and reflects the economic and political fortunes of the continent’s most industrialized nation. It is also a barometer of global risk sentiment and a proxy for emerging markets. Kganyago said the bank was confident that its flexible exchange rate regime and credible monetary policy framework would help the economy weather the external shocks and adjust to the changing global environment. He said the bank was committed to supporting growth and stability in South Africa and beyond.
[Source] Reuters
