South Africa's Interest Rate Cut Might Not Satisfy Demands for Weaker Rand
Interest Rate Cut May Not Satisfy Demands for Weaker Rand
Nadine Hutton/Bloomberg
A five rand coin is held for display in Johannesburg.
A five rand coin is held for display in Johannesburg. Photographer: Nadine Hutton/Bloomberg
South Africa’s central bank will probably cut its key interest rate tomorrow after the inflation rate slid to a four-year low. That’s unlikely to satisfy demands from labor unions and exporters for action to weaken the rand.
The Pretoria-based Reserve Bank will lower the repurchase rate by half a percentage point to 6 percent, the second reduction this year, according to 23 of 26 economists surveyed by Bloomberg. The rest expect the rate to stay unchanged.
The rand’s 30 percent rally against the dollar since the start of 2009 has undermined exports, forcing manufacturers such as Good Hope Textile Corp. to fire workers in a country where one in four have no job. Labor unions and the Organization for Economic Cooperation and Development have called on the central bank to weaken the rand. With interest rates near zero in the U.S., the Euro-zone and Japan, the bank can do little to damp demand from carry-trade investors who borrow in countries with lower rates and invest in markets offering higher returns.
“An interest rate cut this week isn’t going to influence the rand much,” Jean-Francois Mercier, an economist at Citigroup Inc., said in a phone interview from Johannesburg on Sept. 6. “If they wanted to undermine the carry trade, they would have to cut by 200 basis points.”
The Reserve Bank has reduced the repurchase rate seven times since December 2008, failing to halt the rand’s rally. The bank expects inflation, which slowed to 3.7 percent in July, to remain inside the 3 percent to 6 percent target range until the end of 2012.
‘Benign’
“Inflationary pressures are relatively benign,” Governor Gill Marcus said on Sept. 2. She is scheduled to announce the rate decision in a televised press conference that starts at 3 p.m. in Pretoria.
Lower rates have done little to reduce demand for the rand, with net foreign purchases of South African bonds surging to almost 67 billion rand ($9.3 billion) this year. That’s more than any full-year inflows since 1995, according to data from JSE Ltd., which operates the country’s stock and bond exchanges.
South Africa’s benchmark rate compares with rates of between zero and 0.25 percent in the U.S., 0.5 percent in the U.K., 1 percent in countries using the euro and 0.1 percent in Japan.
Yield Differential
“Even with a cut this week, the yield differential between us and the advanced countries is still very attractive and in our favor,” said Trevor Barsdorf, a market analyst at the bond and foreign-exchange consultants Econometrix Treasury Management in Johannesburg.
The rand gained as much as 0.2 percent to 7.2487 against the dollar today and was trading at 7.2625 as of 3:27 p.m. in Johannesburg, little changed from 7.2633 late yesterday.
With interest rates in developed countries remaining close to zero for at least a year, South Africa will continue to see rising portfolio inflows, Ismail Momoniat, the deputy director general of the National Treasury said yesterday. The government is looking at the “best mechanism” to deal with that, he said.
Failure to cut the key rate tomorrow may push the rand to 7.10 to the dollar or even stronger, Matthew Sharratt and Arko Sen, analysts at Bank of America Merrill Lynch, said in a report today.
Economic Cost
Exports fell as a share of gross domestic product to 27 percent in 2009 from 36 percent in 2008, according to the central bank. Steinhoff International Holdings Ltd., Africa’s largest furniture maker, said yesterday the rand’s strength will continue to undermine earnings.
“Lowering of interest rates will be very good for the economy and the consumer,” Steinhoff’s Chief Executive Officer Markus Jooste said in a phone interview. “The weaker rand will stimulate exports and create jobs. The current rand is too strong for the South African economy.”
South Africa’s efforts to improve living standards are lagging behind those of other emerging nations and it needs to do more to encourage exports, the Paris-based OECD said in its first survey of Africa’s biggest economy, published on July 19.
The Congress of South African Trade Unions wants a rate cut of 1 percentage point tomorrow to weaken the rand and help create jobs, spokesman Patrick Craven said in a phone interview from Johannesburg on Sept. 6.
Good Hope Textile, based in King William’s Town in Eastern Cape province, plans to fire 761 employees, or 65 percent of its workforce, as the manufacturer struggles to compete against cheaper imports, it said in a statement on Aug. 31.
Election Pledge
President Jacob Zuma is failing to meet his election pledge to create more jobs, weakening support from Cosatu, which is part of his ruling alliance and helped him oust former president Thabo Mbeki as party leader in 2007. The economy has shed 627,000 jobs since Zuma took office in May 2009, according to data from the statistics office.
“We are not happy,” Zwelinzima Vavi, general secretary of the labor federation, told reporters on Aug. 26. The alliance with the ANC has become “dysfunctional,” he said. “We face a serious crisis of legitimacy amongst workers if we can’t demonstrate concrete gains.”
To contact the reporters on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net
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