Rate cuts could lift the rand

JOHANNESBURG – The rand, which has weakened over the past few days after signs of strength last month, could benefit from the interest rate cuts expected this year, economists said on Tuesday. Their views run counter to the traditional view that high interest rates support the rand by attracting deposits from abroad.

The currency, which hit a low point of about R11,50 a dollar in October, was bid at R9,963 Tuesday afternoon.
Brian Kantor, the investment strategist at Investec Private Securities, said lower interest rates would promote economic growth. ‘It is expectations of growth that surely drive the exchange value of the rand more than interest rate differences.’
Kantor argued that the Reserve Bank’s 0,5 percentage point cut in its official repo rate last month was not enough. ‘They should have cut by at least 100 basis points, and will need to be very aggressive in cutting rates this year as expected by the money market.’
Chris Hart, the chief economist at Investment Solutions, said: ‘Emerging market currencies do better on rate cuts because foreigners investing in emerging markets are attracted by growth prospects rather than yield.’ He pointed to the experience in 2002, when the rand firmed after the rate cutting cycle started, followed by rand weakness when the rate rising cycle commenced in June 2006.
Johan Botha, an economist at Standard Bank, said the local economy would benefit from rate cuts, unlike the US, the UK, the euro zone and Japan, which were moving into recession despite a series of rate cuts to counter the impact of the credit freeze on those markets. ‘Rates there are already so low that the latest rate cuts make very little difference,’ he said.
Last month the Federal Reserve cut its target rate to between zero and 0,25 per cent.
The Bank of England cut its base rate by 0,5 percentage point to 1,5 per cent last week. The European Central Bank was expected to cut its base rate from 2,5 per cent to 2 per cent yesterday.
Elna Moolman, the group economist at Barnard Jacobs Mellet, said the aggressive cuts in these and other economies would, in any event, preserve the interest rate differential between South Africa and trading partner countries.
In South Africa, the Reserve Bank’s official repo rate is 11,5 per cent. Last month’s cut followed a five percentage point hike from seven per cent. The hikes came as inflation moved through the ceiling of the Reserve Bank’s three per cent to six per cent target range, well into double digits.
Moolman agreed the rand ‘might ultimately benefit from rate cuts through their boost to economic growth’. She said the stimulus from monetary policy would be complemented by the influence of lower inflation and possible relief for individuals in next month’s budget.
The inflation outlook has improved as the US oil price fell from a high of US$147 a barrel in the middle of last year to US$37,94 Tuesday afternoon. London Brent crude was at US$44,12. Inflation, measured by the consumer price index (CPI), has already fallen from a peak of 13,7 per cent in August to 11,8 per cent in November.
Further rate cuts are expected as inflation falls. Kantor said rates in the money market showed market participants expected a one percentage point cut within three months and a further one percentage point cut in the next three months. The Reserve Bank’s monetary policy committee is due to meet in the second week of next month, on April 16 and on June 25.
-Business Report