Rand's Record Fall Adds Pressure on South Africa's Central Bank

  • Currency falls third day to as low as 14.3827 per dollar
  • Bets stacking up for rate increase at MPC meeting next week

South Africa’s rand plunged to a record against the dollar on Tuesday, increasing pressure on the central bank to raise borrowing costs at a policy meeting next week.

The currency weakened as much as 0.6 percent to 14.3827 per dollar, before erasing the decline to gain 0.1 percent to 14.2835 by 5:25 p.m. in Johannesburg, paring its slump this year to 19 percent. Yields on benchmark government rand bonds due December 2026 fell 2 basis points to 8.59 percent.

Reserve Bank Governor Lesetja Kganyago left the benchmark repurchase rate at 6 percent in September after the MPC raised borrowing costs by a total of 1 percentage point since last January and may do so again on Nov. 19 as the rand’s decline risks boosting inflation. Forward-rate agreements, used to speculate on interest rates, are predicting a more than 55 percent chance of a quarter percentage-point increase in the policy rate to 6.25 percent.

“We’re going to be at the mercy of the dollar if they don’t do anything next week,” Ion de Vleeschauwer, chief dealer at Bidvest Bank in Johannesburg, said by phone. “And 25 basis points won’t do much for the rand. If they are going to do something they need to act aggressively and do 50 basis points.”

Electricity shortages and slowing growth in China, South Africa’s biggest trading partner, have weighed on growth at a time when commodity prices are at a 16-year low. Raw materials including iron ore, coal and precious metals account for more than 50 percent of South Africa’s exports.

The rand declined even as data showed manufacturing unexpectedly rebounded in September. Factory output climbed 0.9 percent from the year before, compared with a decline of 0.3 percent the previous month. The median estimate in a Bloomberg survey was for a contraction of 2.5 percent.

Despite the positive surprise, there is little evidence that South African companies are befitting from the weak rand, but the data does make the economy look less strained, John Ashbourne, Africa economist at Capital Economics said in a note. "These signs of life will increase the SARB’s willingness to hike rates to 6.25% next week, a move that we believe is likely given the rand’s weakness and the increasingly likelihood of a U.S. hike in December."

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