Mariam Isa
24 October 2008
Johannesburg — THE Reserve Bank should stand its ground and not raise interest rates in the face of this week's rand plunge as falling commodity prices and global slowdown will ease inflation pressures.
The rand's abrupt descent to R11,83 to the dollar yesterday - a new six-and-a-half year low - has fanned concern it will prompt price pressures that could force the Bank to raise rates again.
But the global environment is not at all like it was late in 2001, when the Bank halted an even more daunting fall in the exchange rate with an emergency interest rate hike.
"The issue facing the Reserve Bank now is how much is this going to affect inflation," said Standard Chartered regional Africa head Razia Khan.
"It's not clear that this poses the same threat to price stability that the last round of severe rand volatility did."
The rand sank to a record low of R13,85/$ at the end of 2001, knocked by global risk aversion after the 9/11 attacks.
It is not there yet, but it has plumbed a record low of R15,22 against the euro, the currency of SA's main trade partner.
Currency depreciation normally stokes price pressures by making imports more expensive. With inflation already at a record 13,6%, alarm bells can be expected to go off at the Bank - as they did seven years ago.
But this time round, several of the world's biggest developed economies are sliding into a recession while growth in other economies, including SA, is slowing sharply.
Putting aside concerns about the effect of another rate hike on consumer spending, the global trend will put downward pressure on inflation, as demand for commodities and other goods wanes.
The price of oil - one of the main global inflation drivers in the past two years - has plunged to $67 a barrel, less than half of its peak at $147 in July.
Despite its depreciation, this will cut the rand-denominated price of oil by another 17% from its levels last month, says Nedbank economist Dennis Dykes.
"I think it would be incredibly unwise to raise interest rates now, given the global scenario and the likelihood of deflationary forces on a global scale," he said.
Dykes said the only valid reason for raising rates now would be to try to stem the capital outflow generated by foreign selling of local shares, which has amounted to nearly R44bn in the year so far. This is what is driving the rand down, along with most other emerging market currencies.
But most analysts think that would probably not work, and could spook investors even more, through concerns that SA's growth rate could slow even more sharply than expected.
South African lending rates have already climbed by five percentage points since the middle of 2006, pushing household debt to record levels in relation to disposable income.
Stanlib economist Kevin Lings says another interest rate hike could raise concerns about domestic bad debt at a time when the banking sector can least afford it, given the global credit crunch.
"I don't think there would be any advantage to raising interest rates -- they are already high, and the economy is weakening substantially," he said.
With SA's budget balance sliding back into deficit, prospects of lower tax revenues could also worry foreign investors, and destabilise the rand more, he says.
A key issue is how long the rand stays at today's levels.
"For the moment, I would do nothing," said RMB chief economist Rudolf Gouws.
"But if the rand doesn't recover in the fairly near future it may be appropriate to raise rates to avoid an inflationary spiral," he said.
Be the first to Write a Comment!
Copyright © 2008 Business Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
