Rand Slumps to 4-Year Low as Central Bank Leaves Rate UnchangedRobert Brand
South Africa’s rand slumped to a four-year low and bond yields rose after Reserve Bank Governor Gill Marcus said the depreciation in the currency benefited exporters in Africa’s biggest economy.
The currency dropped as much as 0.8 percent to 9.3149 per dollar, the weakest level since April 2009. It traded 0.4 percent lower at 9.2789 as of 3:20 p.m. in Johannesburg, bringing its decline this year to 8.7 percent, the worst performance out of 25 emerging-market currencies monitored by Bloomberg. Yields on the 13.5 percent bonds due March 2015 climbed five basis points, or 0.05 percentage point, to 5.48 percent, the highest since Dec. 5.
The Reserve Bank kept its benchmark interest rate unchanged for a fourth meeting as a slump in the rand stoked inflation, preventing policy makers from providing further stimulus to spur economic growth. While the weaker currency posed risks to inflation, it provided an opportunity for the nation’s manufacturers to become more competitive in export markets, Marcus said.
“We were expecting a statement that would firmly support the rand,” Guillaume Salomon, a London-based emerging-market strategist at Societe Generale SA, said in e-mailed comments. “This message of support was not delivered. One could even argue some parts of the statement welcomed more currency weakness.”
SocGen sees the rand declining to 9.60 per dollar without central bank intervention, and recommended in a note today that clients take long-dollar positions against the currency.
The Monetary Policy Committee’s move matched the forecasts of all 19 economists surveyed by Bloomberg. Inflation accelerated to 5.9 percent in February from 5.4 percent the month before, exceeding the 5.6 percent median estimate of 19 economists in a Bloomberg survey, a report showed earlier.
Marcus raised her inflation forecast for this year to an average of 5.9 percent from 5.8 percent and estimates it at 5.3 percent in 2014. The inflation rate is set to peak at an average of 6.3 percent in the third quarter of this year, before moderating to 5.2 percent in the fourth quarter of 2014.
“The exchange rate of the rand continues to pose the main upside risk to the inflation outlook,” Marcus said. “However, the depreciated exchange rate provides an opportunity for the manufacturing sector in particular to become more competitive despite the challenging export environment.”
The rand’s decline was “somewhat overdone” and the currency tends to retrace after overshooting, she said. The central bank doesn’t target a level for the rand, which is likely to remain volatile, Marcus said.
The South African economy expanded 2.5 percent in 2012, the slowest pace since a 2009 recession, after a series of mining strikes curbed output. That’s less than half the rate the government says is needed to meet a goal of slashing 24.9 percent unemployment. The Reserve Bank forecast growth of 2.7 percent for this year.
Forward-rate agreements starting in 12 months climbed 14 basis points today to 5.37 percent, an eight-month high. The contracts yield 25 basis points more than the Johannesburg Interbank Agreed Rate, implying about a 50 percent chance of a 50 basis-point rate increase in the next year, according to Mohammed Nalla, head of strategic research at Nedbank Group Ltd.
“We’ve seen yields tick up quite sharply on the back of the inflation print,” Nalla said by phone from Johannesburg. Expectations that interest rates will rise as the rand weakens “are impacting yields, especially at the long end of the curve,” he said.
The rand’s three-month implied volatility against the dollar rose six basis points today to 13.3 percent, the highest since Jan. 24, indicating that options traders see wider swings in the currency in coming months.