Rand Drops as Kganyago Damps Talk of Bigger Rate Increases

  • SARB Governor says 25 basis-point increases `not small'
  • Nedbank's Nalla says dovish comments may disappoint market

The rand weakened, reversing gains against the dollar, after South African Reserve Bank Governor Lesetja Kganyago said increasing interest rates in increments of 25 basis points is “not small,” damping speculation that policymakers may move in bigger steps to ward off inflation.

The currency of Africa’s most industrialized economy dropped 0.4 percent to 16.8457 per dollar as of 6:39 p.m. in Johannesburg after earlier strengthening as much as 0.5 percent.

“Given where the policy rates are, a 25 basis-point hike is not a small hike necessarily,” Kganyago said in an interview with Bloomberg TV at the World Economic Forum in Davos on Wednesday. Tightening steps taken by the central bank’s Monetary Policy Committee so far have been “very measured,” he said.

After falling 25 percent against the dollar in 2015, the rand weakened a further 8 percent since the start of this year, the worst performance of 16 major currencies tracked by Bloomberg. That’s adding to pressure on inflation, which accelerated to 5.2 percent in December as the worst drought in more than a century pushed up food prices. The MPC meets next week after raising the benchmark rate by 125 basis points since the start of 2014, moving by a quarter percentage point twice last year.

“Effectively most markets have been pricing a 50 basis-point hike at the January meeting,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg. “If the governor’s comments are construed to be a lot more dovish then that would be a disappointment to the market.”

Rate Speculation

Forward-rate agreements starting in one month, used to speculate on borrowing costs, show investors are pricing in about 40 basis points of rate hikes compared with almost no increases at the end of November.

Kganyago’s comments are “shifting focus away” from the possibility of raising rates by more than 25 basis points and creating worrying signs that the MPC “are not wanting to go that big,” Peter Attard Montalto, the London-based senior emerging markets strategist at Nomura International Plc, said in e-mailed comments. “We would view a 25 basis-point increase as a policy mistake.”

Zuma, 73, roiled markets and sent the rand to record lows in December by firing Finance Minister Nhlanhla Nene and replacing him with a little-known lawmaker, raising questions about his commitment to fiscal targets. Zuma reconsidered four days later and re-appointed Pravin Gordhan, who had served as finance minister from 2009 to 2014. The currency fell to a fresh all-time low of 17.9169 per dollar in thin Asian trading on Jan. 11.

The rand’s flash crash “is something that we are concerned about,” Kganyago said. “It’s something that we have been looking at and we would like to understand what is that flash because it doesn’t look like trading actually takes place. There is nothing that a central bank can do to stop a currency to adjust to where fundamentals should be. Exchange rates do overshoot and to the extent that this one has overshot it will come back and adjust to the fundamentals.”

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