The rand lifted by more than 1% to dip below R17 to R16.97 against the dollar at 3.30pm, its strongest since January 16, having closed around R17.15 to the dollar on Wednesday on a terrible week for the rand as it nearly touched R17.50 on Tuesday.
As expected, the US Fed delivered a smaller 25 basis point rate hike to take the range between 4.5%-4.75% per annum, its highest since October 2007.
Fed chairperson Jerome Powell delivered a message that acknowledged the stabilisation of inflation by saying that “disinflationary process has started” but without hinting at a pivot in the bank’s stance.
Powell added that it was “certainly possible” that the Fed will keep its benchmark interest rate below 5% and that it can get inflation back down to 2% without significant economic damage.
TreasuryONE currency specialist Andre Cilliers said the rand had rallied strongly after the Fed’s decision as it was a touch softer in the morning at R17.05 to the dollar, and some consolidation at current levels could be expected.
Cilliers said the Fed kept to its hawkish stance by hinting at two more possible rate hikes after Wednesday’s 25 basis points hike.
“On the other hand, markets are now betting on the Fed having to cut rates as early as the second half of 2023 as the US economy slows,” Cilliers said.
“Fed Chair Jerome Powell acknowledged the gains made in slowing inflation but said more work needed to be done.”
The Bank of England is also expected to raise its interest rates by 50 basis points to 4% during its February meeting, a 10th consecutive rate increase, which would push borrowing costs to the highest since 2008.
Investors will be looking for any clues about the central bank's next steps, with many suggesting this will be the last big rate hike of the current tightening cycle, the most aggressive one in three decades.
Investec chief economist Annabel Bishop said the rand strengthened in response to the increased balance in the Fed’s tone towards weighing the effects of higher interest rates on growth, as well as inflation.
Bishop, however, said South Africa’s gains had been typically less than peer emerging market economies as investors worry about the country’s declining productive capacity as electricity supply shortages worsen.
The SA Reserve Bank has already significantly lowered its growth forecast for 2023 to 0.3% due to the ongoing energy crisis and other structural challenges.
“Failures in consistent water supply; sufficient state rail and port capacity to meet demand; state governance failures, including corruption, inefficiencies and wastage; and inappropriate expenditure of state funds all reduce investor confidence,” Bishop said.
“Global financial markets will continue to watch the Fed closely, with risk aversion potentially subsiding further this week benefiting risk assets, although foreigners remain negative towards South Africa’s portfolio assets as domestic risks rise.”
BUSINESS REPORT