Currency uncertainty will add complexity to monetary policy, warns Reserve Bank

29 November 2018 - 10:39 By Sunita Menon
Reserve Bank deputy governor Daniel Mminele.
Reserve Bank deputy governor Daniel Mminele.
Image: Russell Roberts

Deputy Reserve Bank governor Daniel Mminele cites continued tightening in global financial conditions, a change in investor sentiment towards emerging markets, escalating trade conflicts, and geopolitical developments as key risks to the rand

The rand and other emerging market currencies will remain volatile, which adds complexities to monetary policy, warned Deputy Reserve Bank governor Daniel Mminele.

He cited the continued tightening in global financial conditions, a change in investor sentiment towards emerging markets, escalating trade conflicts, and geopolitical developments as key risks to the rand.

 “What the future holds remains uncertain,” he said in Sandton on Wednesday.

“As such, it is likely that the rand, along with other emerging market currencies, will remain volatile,” he said.

Rand forecasts remain widely dispersed as a consequence of this, he said.

“This uncertainty adds significant complexity to the conduct of monetary policy, the most recent outcome of our monetary policy meeting and the finely balanced decision being a good case in point.”

This comes just a week after the Bank raised the repo rate for the first time in two years by 25 basis points. The monetary policy committee (MPC) warned last week that the currency was undervalued. Mminele said according to forecasts, the rand would remain undervalued through 2019.

The MPC will look through volatility and will focus on macroeconomic fundamentals, he said. The Bank will continue to allow the exchange rate to absorb initial shocks while policy actions will focus on addressing second-round price effects.

He added that at times it can become difficult to distinguish between first and second round effects, however, it is important that policy decisions are not informed by “short-run market developments in either direction”.

Similar to other emerging market currencies, the rand has depreciated against the US dollar for most of the year. According to Bloomberg, the local currency depreciated 28% from late February to early September.

“Despite the fact that there were no events unique to SA that could have triggered weakness of such magnitude, the local unit ranked among the worst performing emerging market currencies during that period,” said Mminele.

He said close attention needs to be paid to when the currency started to depreciate as the rand surged towards the end of last year and at the start of 2018 following improved perceptions around domestic political risks.

“This resulted in portfolio inflows which contributed to the relative strength of the rand,” he said.

However, recently SA has seen some slowdown of outflows and some resumption of inflows which has contributed to the rand recovering some of its losses.

The rand has had its best month in 2018 in November, benefiting from an improving sentiment towards emerging, markets, among other factors. The local currency has gained 5.5% against the dollar so far this month, hovering just below R14/$ on Wednesday afternoon. This puts it on track for the best performance in the month of November since 2003.

menons@businesslive.co.za

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