Rand takes a hit on shaky interest rate expectations

The rand lost ground against the dollar on Tuesday (21 November) as market sentiment went risk-off following the release of the minutes of the latest US Federal Open Market Committee (FOMC) meeting, which points to higher global interest rates lingering for longer.

The rand weakened to R18.77 against the dollar on the day, pulling back slightly to R18.63 on Wednesday.

According to Investec chief economist Annabel Bishop, the minutes showed concern about “only limited progress in bringing down inflation in core services excluding housing” in the United States, as well as the softening of prices and gradual decline in housing service inflation.

The overall read of the FOMC’s minutes was hawkish, keeping the general market sentiment in line with the view that global inflation is likely to stay higher for longer.

“Markets viewed the minutes overall as showing that the (US) Federal Reserve Bank needs to see more evidence of inflation cooling to be able to be sure of success in bringing it back to target, and so risks of higher interest rates have been flagged,” Bishop said.

“Risks around the inflation forecast were seen as skewed to the upside, given the possibility that inflation might prove to be more persistent than expected or that additional adverse shocks to supply conditions might occur.”

While this is a focus on US inflation, it is still highly applicable to South Africa, which has been in the same high-inflation, high-interest-rate boat as the rest of the world.

Bishop said that contrary to the build-up for interest rate cuts and signals for the hiking cycle to be over, the FOMC is highlighting specifically that they are not.

“Market expectations for interest rate cuts next year have been building, and the Fed worries this will positively impact consumers and businesses by causing spending and demand to rise, and so derail its efforts to lower inflation,” she said.

While expectations are that the South African Reserve Bank will hold on rates this week, and start its cutting cycle by mid-2024, markets have eyes on the FOMC for its next move, which might impact this view.

“The FOMC next meets to deliver its interest rate decision on 13th December, but there are still expectations of no further rate hikes this year or next.

“USD strength in reaction to the Fed minutes is likely to prove temporary, with the rand strengthening into 2024,” Bishop said.

Read: What it will take to get the rand under R18 to the dollar