Johannesburg - The rand strengthened after falling to record lows against the dollar earlier in the session yesterday, lifted by a modest return of risk appetite following a sharp sell-off sparked by concerns about China’s slowing growth.
At 1.30pm, the rand had climbed 1.01 percent to R13.93 to the dollar, rising with other emerging market currencies against the dollar. It fell to as low R14.1588 against the dollar earlier. It was bid at R13.9661 to the dollar at 5pm, up 5.69 cents from the same time on Monday.
Annabel Bishop, the chief economist at Investec, said the currency fell after hawkish comments at the September 23 meeting of the Reserve Bank’s monetary policy committee (MPC), signalling further future rate hikes, along with renewed fears on the performance of China’s economy and a fall in US stocks.
Bishop said since the MPC’s statement, foreigners had sold R2 billion worth of South African equities, as the Reserve Bank rigidly stuck to its “gradual normalisation path” (higher interest rates), while the domestic economic outlook became markedly more gloomy, with a rising risk of recession.
“For an economy in a downturn (and industrial sector in recession), a return to a neutral interest rate is inappropriate. Instead, monetary accommodation should increase,” she said.
“The US is not at risk of recession but even it has delayed its normalisation of monetary policy on global weakness.”
Bishop said South Africa’s hawkishness was causing it to be an outlier globally on the monetary policy front.
“Inflation is in target this year, and likely to have a temporary breach only next year due to exogenous factors beyond the Reserve Bank’s control. A temporary breach is allowed under the inflation targeting framework.”
She said South Africa’s deteriorating economic outlook increased the risk of credit downgrades, prompting much foreign selling of South African assets and adding to the weakness of the rand.
BUSINESS REPORT