Africa-Press – South-Africa. After large gains throughout Wednesday, the rand retreated slightly after the US Federal Reserve indicated it expects more hikes this year.
AFP reported that the US central bank, as expected, opted to hold its benchmark lending rate between 5.0% and 5.25%. But the latest forecasts from policymakers indicated strong support for two more hikes in 2023. Rates may likely rise by another half of a percentage point by the end of this year as the Fed tries to cool inflation.
Investors are used to South Africa offering much higher interest rates than developed markets like the US, which has made rand investments attractive.
But following aggressive US rate hikes, that differential has now shrunk. The US has hiked by a huge 500 basis points to date in its current cycle, and even after the last hike, South Africa is only at 475bp.
If the Fed hikes again, the rand will look even less attractive – especially since South Africa’s Reserve Bank has cooled on more rate hikes, with Governor Lesetja Kganyago acknowledging that rates are now “restrictive” and that the bank now wants to monitor the effect of the big hikes.
After starting Wednesday’s trading around R18.61, the rand later hit R18.25 – which means it has erased all losses since the US accused South Africa of loading arms onto the Lady R, a sanctioned Russian ship that docked at Simon’s Town Naval Base more than a month ago.
Before the accusation, the rand was trading at around R18.30/$. But the Lady R crisis, along with confirmation that Russian President Vladimir Putin will have diplomatic immunity if he visits South Africa for the planned BRICS summit in August, triggered an almighty crash which saw it hit a new record low of just below R20/$ two weeks ago.
The Fed announcement initially put pressure on the local currency on Wednesday evening, with the rand falling to R18.44 in response. However, by 21:30, the currency recovered to R18.36.
The US policymakers added that they expect 100 basis points of rate cuts in 2024, and that inflation should fall fast next year.
The article has been updated throughout following the Fed announcement.
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