Rand Retreats as Fed Hints at Additional Rate Hikes in 2023

The South African rand, which had gained significantly earlier in the day, suffered a minor setback after the US Federal Reserve signalled its intention to raise interest rates further this year.

According to AFP, the Federal Reserve of the United States chose to keep its benchmark lending rate at a range of 5.0% to 5.25%, as expected. However, policymakers’ most recent projections show strong support for two additional rate hikes in 2023. In order to combat inflation, the Fed may raise interest rates by half a percentage point by the end of the year. Previously, the appeal of rand investments stemmed from South Africa’s proclivity to offer significantly higher interest rates than developed markets such as the United States.

Nonetheless, the interest rate differential has narrowed as a result of the United States’ aggressive rate hikes. The US has raised rates by a substantial 500 basis points during the current cycle, while South Africa has only reached 475 basis points, even after its most recent hike. If the Fed decides to raise interest rates again, the rand may become less appealing, especially given South Africa’s Reserve Bank’s reservations about further rate hikes. Governor Lesetja Kganyago admitted that interest rates are now considered “restrictive,” and the bank intends to monitor the impact of previous significant hikes.

The rand briefly reached R18.25 during the day, effectively wiping out all losses incurred since the US accused South Africa of loading arms onto the Lady R, a sanctioned Russian vessel that recently docked at Simon’s Town Naval Base. The rand was trading at around R18.30/$ prior to the accusation. However, the Lady R incident, combined with confirmation that Russian President Vladimir Putin would have diplomatic immunity during his visit to the BRICS summit in August, triggered a significant crash, sending the rand to a new record low of just under R20/$ two weeks ago.

The initial announcement from the US Federal Reserve put pressure on the local currency, causing the rand to fall to R18.44 for a brief period. However, by 21:30, the currency had recovered and was trading at R18.36.

Furthermore, US policymakers stated their expectation for a 100 basis point rate cut in 2024, as well as a rapid decline in inflation next year.

Main Image:    IOL