South Africa’s Rand Gains Offer South Africa’s Kganyago ‘Cushion’ on Rates

South Africa, Capital Markets in Africa: The recent strength of South Africa’s rand is providing a cushion for the country’s policy makers and shouldn’t lead to complacency in tackling inflation, Reserve Bank Governor Lesetja Kganyago said.

“The risks to the inflation outlook has to do with possible future weakness in the currency,” Kganyago told reporters at a central bank event in Pretoria on Thursday. “The fact that the currency has strengthened has not taken that way, it has just provided us with a cushion over a period of time, we do not know for how long.”

Slower inflation may give the central bank the opportunity to halt an interest-rate increase cycle and support an economy that it estimates won’t expand this year. Policy makers have been caught in a dilemma of weak growth and inflation outside its 3 percent to 6 percent target. The rand has appreciated 15 percent against the dollar in 2016 and more than 12 percent versus the euro.

While the monetary policy committee can’t respond to short-term currency moves, the central bank is “cautiously optimistic” about its effect on inflation, Reserve Bank Deputy Governor Daniel Mminele said.

“It’s a function of how sustained” the rand’s gains would be, Mminele said. ”This may well just be a period of correction.”

Consumer inflation was 6.3 percent in June and on July 21 the MPC forecast it will peak at 7.1 percent in the final quarter, only returning to the target band in the third quarter of 2017. Since then the rand has gained more than 6 percent against the dollar, sending the five-year breakeven rate, a measure of bond investors’ price expectations, to 6.27 percent, the lowest level since November.

The rand weakened 0.2 percent to 13.4329 per dollar by 12:25 p.m. in Johannesburg on Friday, paring gains this week to 2.2 percent.

The central bank raised its benchmark rate by 125 basis points from July last year to March. Kganyago said last month the MPC had “pressed the pause button” on the raising cycle when it kept the rate unchanged at 7 percent.

Mining and manufacturing data in the second quarter suggest the economy won’t slip into a recession this year, even as it’s still caught in a “low-growth trap,” Rashad Cassim, the central bank’s head of research, said at the same event.

Manufacturing expanded 4.5 percent in June, the fastest year-on-year growth in a year, while mining output has shown signs of improvement after contracting in the first quarter. The economy shrank an annualized 1.2 percent in the first quarter from the previous three months.

Source: Bloomberg Business News