South African Reserve Bank Governor Gill Marcus said the rand may strengthen as its decline beyond 9 to the dollar is overdone.
“We had an appreciating currency, which was not very good for our manufacturing and export market,” Marcus said in an interview with Manus Cranny on Bloomberg TV’s On The Move show from Cernobbio, Italy today. “Now it has moved over the 9 rand and trading between 9 and 9.20 rand. In our view, that is overdone. It will over a period of time retrace back to a more reasonable level.”
The rand has slumped 7.1 percent against the dollar this year, the third-worst performing currency of 16 major ones tracked by Bloomberg after the Japanese yen and British pound, falling to its lowest level in almost four years yesterday. A weaker rand is adding to pressure on inflation, which may temporarily breach the Reserve Bank’s 3 percent to 6 percent target this year, Marcus said.
The currency strengthened after Marcus’s comments, gaining as much as 0.6 percent to 9.0879 against the dollar and was trading at 9.0929 at 2:39 p.m. in Johannesburg.
Marcus said in a later speech in Cernobbio that policy makers in South Africa have little room to follow central banks in Hungary, Poland and Turkey that have cut interest rates this year to bolster their economies. The Pretoria-based Reserve Bank has kept its benchmark interest rate unchanged at 5 percent since lowering it by half a percentage point in July.
“The relatively subdued growth outlook and the negative output gap have meant that we have been more tolerant of inflation at the upper end of the target range,” Marcus said in the speech. “However, our room for further accommodation is constrained by the need to keep inflation within the target over a reasonable time horizon.”
Risks to inflation are on the “upside” because of the weaker rand and rising labor costs, she said.
Inflation slowed to 5.4 percent in January from 5.7 percent in the previous month. A 1 percentage point decline in the currency raises the inflation rate by as much as 0.2 points, according to estimates from Johannesburg-based Standard Bank Group Ltd.
Trade Minister Rob Davies and Economic Development Minister Ebrahim Patel said yesterday the rand’s weakness may benefit manufacturers. The currency has become more competitive and is unlikely to strengthen to 7 per dollar any time soon, Davies said. Finance Minister Pravin Gordhan said on Feb. 27 that South Africa can live with a weakened rand as long as the impact on inflation is limited.
The currency plunged to 9.1884 per dollar yesterday, the weakest level since April 2009, and remains the most volatile of the 16 major ones tracked by Bloomberg.
“Part of the challenge is the volatility,” Marcus said. “We will be watching it very closely.”