Hike interest rates to strengthen the Rand

The painful move by the South African Reserve Bank (SARB) to hike interest rates is crucial in strengthening the Rand/USD exchange rate.

In an exclusive interview with Business 7, Simonis Storm economist Theo Klein said increasing interest rates encourage foreigner investors to keep their money within South Africa and prevent outflows in order to maintain the value of the Rand.

Namibia and South Africa import most of what is consumed and a weak Rand/USD rate is inflationary, he said.

A weak Rand/USD exchange rate makes imports expensive, while exports become cheap. In addition, a strong Rand/USD exchange rate makes imports cheap, whereas exports become expensive.

According to the Namibia Statistics Agency (NSA), Namibia’s import bill stood at N$8.5 billion in February, while export earnings came in at N$8.1 billion, leading at a trade deficit of N$412 million.

The South African Reserve Bank (SARB) recently raised the repo rate by 50 basis points from 7.25% to 7.75%. The prime lending rate in South Africa currently stands at 11.25%.

“After SARB hiked the repo rate, we saw the Rand moving to levels we last saw in January,” Klein said.

According to Simonis Storm quarterly report, during the first quarter of 2023, the Rand breached 18 against the US dollar due to heightened political risk and deteriorating domestic fundamentals.

Weakening economic productivity as rail and port transport capacity deteriorates, coupled with troubled water supply led the SARB to cut growth forecasts to near zero for 2023, from 1.1% year-on-year to 0.3% year-on-year on 26 January 2023, the report reads.

The Rand also weakened as the US dollar strengthened during February as investors recalibrated their inflation expectations for the US, allowing for a more moderate descent in inflation. In addition to this, risk off sentiment is supported by concerns over the health of banks in the US. Indeed, foreign investors have been net sellers of South African equities and bonds year to date, adding to Rand weakness.

Strengthen

Business Tech reported that the rand is only likely to strengthen to R15.90/USD if the SARB hikes by around 100bp and the US Fed does not move further, says Investec chief economist Annabel Bishop.

This is because South Africa’s current interest rate differential with the US hike cycle is still sitting at 50 basis points, with the SARB having hiked by 425bps since November 2021 and the US hiking by 475bps.

Fin24 recently reported that the US Federal Reserve raised its benchmark lending rate by 25 basis points from 4.75% to 5%.

Markets responded well to the SARB’s recent 50 basis points hike, with investors pointing out that it makes South Africa’s money markets a very attractive destination for foreign investors.

Namibia has close economic ties with South Africa as the local currency is pegged to the rand.

At the first monetary policy announcement for the year in February, the Bank of Namibia increased the repo rate by 25 basis points from 6.75%.

The repo rate in Namibia currently stands at 7%, while the prime lending rate stands at 10.75%. Inflation increased to 7.2% in February from 7% recorded in January. The next monetary policy announcement is expected to take place this month.

Both the SARB and the US Fed will make their next interest rate decisions in May – on May 25th and May 5th, respectively. [email protected]