South Africa’s rand plummeted to its weakest point on record at R19.74 to the dollar following the latest rate hike from the South African Reserve Bank (SARB).
The SARB’s Monetary Policy Committee (MPC) announced another 50 basis point hike on Thursday (25 May), marking the tenth in a rate cycle that dates back to November 2021.
Subsequently, the already downtrodden rand took a massive blow – breaking the typical market reaction where tighter monetary policy encourages the currency’s growth.
This may have implied that markets were expecting a higher rate hike.
Earlier this week, Investec, taking into account the major negative sentiment around South Africa, said that a bigger 75 basis point hike may need to be needed to return any level of stability to the currency.
“Higher interest rates weaken the economy, along with substantial electricity and water shedding capacity and very weak rail and port capacity, all of which is negative for the rand,” said Investec chief economist Annabel Bishop.
Responding to the dip, the governor of SARB, Lesetja Kganyago, said: “The steps we take on the interest rate front might have an effect on the foreign exchange market, but we do not adjust our policy stance to deal with the exchange rate.”
“We adjust our policy stance to deal with the effects of the exchange rate on inflation – so we are responding to inflation, not the exchange rate.”
The governor said that a 75 basis point hike was discussed in the meeting, as was a hold on the rate.
“We considered all of this. Based on the data that we have, we came to the conclusion that the correct decision to go with was 50 basis points,” he said.
The rand has been under pressure for some time. In recent weeks it kept hitting new lows following heightened anxieties over the prevailing power crisis and grid collapse, as well as significant geopolitical tensions arising from allegations that South Africa supplied arms to Russia.
Before the MPC decision, Andrew Matheny at Goldman Sachs indicated that market expectations were set that the SARB would react to the exchange rate weakness.
Following the meeting, the rand pulled back slightly to around R19.64 to the dollar.
Read: Reserve Bank hikes rates by another 50 basis points
