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Repo rate and rand exchange rate volatility are sign of uncertainty in financial markets

Repo rate and rand exchange rate volatility are sign of uncertainty in financial markets

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The rand moved nervously last week in a volatile band as uncertainty on the way forward for the repo rate and global markets fed nervousness.

Last Wednesday it was shocking news that South Africa’s inflation rate came in higher than expected at 7.6% in October, above market expectations of 7.4%. Increases in the price of food and non-alcoholic beverages by 12.0% since last October (y-o-y), and in transport by 7.1% (y-o-y) – due to the 30% year-on-year increase in fuel prices – were the main contributors to the higher inflation rate.

In reaction to the higher inflation rate, as well as expectations that the US Federal Reserve will increase its Fed rate by another 0.75% this coming week, the Monetary Policy Committee (MPC) of the SA Reserve Bank had no other choice than to also increase the repo rate for the third consecutive time by 0.75%. This pushes the prime rate that banks are asking to over 10.0% (10.25%).

The Governor of the Reserve Bank, Lesetja Kganyago, in the statement of the MPC last Thursday, said: “Risks to the inflation outlook are on the upside.” This indicates that the MPC evaluates the current upside interest rate cycle is not over. Two of the MPC’s members felt that only an increase of 50 basis points was necessary, the other three voting for 75 points.

It seems that at the next meeting it could be that the increase will be only 0.5%. Especially given the relative stronger rand and expectations fuel prices will start to come down, as oil trades currently at levels lower than $64 per barrel, almost $10 a barrel lower than the previous week.

The rand exchange rate is volatile and moving between R16.96 and R17.34 to the dollar during the week, but the currency is much stronger than the previous month when the fuel prices were set.

The price for diesel at this stage is already over recovered by 112 cents per litre and should decrease at the beginning of December. Therefore, one can expect the inflation rate for December and January to ease.

In reaction to the repo rate increase and nervousness on the Fed decision this week, as well as the non-farm payrolls for November that will be released on Friday, equity prices on the JSE moved sideways last week, but most indices managed to end the week higher.

The All Share Index had increased by 0.8% for the week, and for the first time since April 2022 traded again above 73 000 points. Higher commodity (like coal) and metal prices (gold and platinum) helped the Resources 10 index to increase by 4.5% last week. The index is now already up by 14.8% for the month to date.

On the global front, the market awaits the release of the US non-farm payroll data on Friday as it has a significant impact on interest rate sentiment, the dollar and equities across the world. The market expects an increase of 20 000 new jobs and for the unemployment rate to stay on 3.7%. This is lower than the 4.2% target set by the Fed before it influences its interest rate decision.

The US will also release its personal income and spending data on Thursday, which will indicate if the US economy is staring to contract or not. It will also announce its second estimate of the US economic growth rate for quarter three, and it is expected to be 2.7% and will indicate that there is still room for further interest rate hikes.

For South Africa, Stats SA will announce the country’s unemployment rate for quarter three 2022 tomorrow. It is expected that the jobless rate has increased from 33.9% in quarter one to 34.3% in quarter two. The Department of Customs and Excise will release the balance of trade data on Wednesday, Absa will publish its manufacturing PMI for November on Thursday, and South Africa’s new vehicle sales for November will also be released.

Repo rate and rand exchange rate volatility are sign of uncertainty in financial markets
Chris Harmse

Chris Harmse is an economist of Sequoia Capital Management

BUSINESS REPORT

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