The statement of the Monetary Policy Committee (MPC) on Thursday struck a hawkish note — the SA Reserve Bank is clearly concerned about the rand’s recent meltdown and persistent price pressures.

“Tighter global financial conditions raise the risk profiles of economies needing foreign capital, leading generally to weaker currencies. Given upside inflation risks, larger domestic and external financing needs, and load shedding, further currency weakness appears likely,” the statement said.  

That’s not exactly a vote of confidence in the rand, and when there’s blood in the water, the sharks will circle. And the rand was vulnerable as it had been sinking throughout the day, matching its previous record low of 19.51/US dollar.  

It then clawed back to 19.45/dollar after the 50 basis point hike was announced, but went into free fall after Governor Lesetja Kganyago admitted during the subsequent Q&A session with the media that “the exchange rate is not one of the factors that they [central banks] control … We cannot stop the currency from depreciating.”

The governor was referring to the point that intervention in the currency market produced limited returns. The example he used was the 1998 debacle when the SA Reserve Bank attempted to do so in a futile attempt to arrest the rand’s slide at the time.

The rand was at a new low of 19.70/dollar by late afternoon trade, opening up a clear path to 20/dollar.

It may also be the case that there were some expectations of a bigger hike of 75 basis points, which would have given the rand more support. But the timing of the slide suggests that the governor’s comments may have lured the sharks in for the kill.

In fairness to the governor, who has a reputation for straight talking, he was simply stating well-known facts. But currency traders, when in predatory mode, sense weakness. Such comments are known in the trade as “market moving” and the markets certainly moved in a swift and brutal fashion.  

For South African consumers and the economy, it all amounted to a bloodbath. Rates went up and the rand went down.

Fanning the flames of inflation

Indeed, the 10th consecutive hike takes the SA Reserve Bank’s key repo rate to 8.25% and the prime lending rate for consumers to 11.75%, its highest level in more than a decade. And the rand’s renewed slump will only fan the flames of inflation further — the flames that monetary tightening is supposed to douse.

Returning to the MPC statement, the SA Reserve Bank is clearly rattled by inflation, and further rand weakness only raises the prospects of yet another rate hike at the next scheduled MPC in July.

“Risks to the inflation outlook are assessed to the upside … Domestic food price inflation continues to be elevated, and the risk of drier weather conditions in coming months has increased. Load shedding may additionally have broader price effects on the cost of doing business and the cost of living, in particular as diesel consumption increases,” the statement said.

This points to factors that are also out of the central bank’s hands. A looming El Niño weather pattern could well be a scorcher heralding a devastating drought for southern Africa, which will keep domestic food prices on the boil as crucial crops such as maize wither.

Read more in Daily Maverick: Nasa reports early signs of El Niño formation that could herald drought in SA 

The rolling blackouts battering the economy are estimated by the SA Reserve Bank to be adding 0.5 of a percentage point to inflation, a state of affairs set to worsen as winter sets in.

“Headline inflation is forecast to remain above the upper end of the inflation target range until the third quarter of this year, and will only sustainably revert to the midpoint of the target range by the second quarter of 2025,” the MPC said.

The SA Reserve Bank’s inflation target range is 3% to 6%, and it does not see it slowing to the midpoint of that range for another two years.

Annual consumer inflation in South Africa braked to 6.8% in April from 7.1% in March, but it has been above the top of the Sarb’s target range since May of last year. And food inflation remains near 14-year highs at above 14%.

Data on Thursday showed that the Producer Price Index (PPI) slowed significantly in April to 8.6% from 10.6% in March. But there are still plenty of price pressures in the pipeline.

The SA Reserve Bank did slightly raise its economic growth forecast for 2023 to 0.3%, which is in effect almost no growth. But if the power outages reach Stage 8, that estimate may look optimistic.

Against this sombre backdrop, the government’s borrowing costs are rising sharply.

“The risk premium charged on rand-denominated borrowing has increased sharply. Ten-year bond yields reached a high of 13.78% on the 23rd May,” the MPC statement pointedly noted.

For the sharks, there is still lots of chum in South African waters. DM