A weaker rand makes imported goods much more expensive. This includes commodities such as oil, which South Africa is a net importer of. Photo: Getty Images
The rand weakened to its lowest level since September in two years, dropping over 2.5% weaker on Tuesday, mainly as a result of a stronger dollar.
The local currency, which began its recent descent last week, was trading at R17.11 to the dollar on Tuesday afternoon. It was R17.12 against the Euro and R20.24 against the British pound.
A weaker rand makes imported goods much more expensive. This includes commodities such as oil, which South Africa is a net importer of.
The oil price increased significantly over the last few months before tapering down in the last couple of weeks. This has led to excessive increases in the petrol price even with government’s two-month extension of the reduction in the general fuel levy, which ends on August 3.
At the end of May, government provided motorists with a temporary reduction of R1.50 per litre of petrol between June 1 and July 6, and then a downward adjustment to 75c per litre from July 7 to August 2.
Director at Econometrix Dr Azzar Jammine said:
A lot will depend on the oil price until the end of the month. The oil price has come down a little over the past month.
“The rand falling against the dollar means a high rand price for oil… there was a volatility we were seeing in both the currency and the oil price. It’s really very speculative right now to predict what’s going to happen to fuel prices.”
A weaker rand is inflationary and would strengthen the case for the Reserve Bank to hike rates next week. Consumer price inflation (CPI) is currently standing at 6.5% much higher than where the Reserve Bank would like to see it.
Chief investment officer at Makwe Fund Managers Makwe Masilela said the central bank’s monetary policy committee might increase interest rates more than the already pencilled in 50 basis point.
“We cannot rule out the possibility of a 75-basis point interest rate hike as said by our governor at the sidelines of the recent G7 meeting,” Masilela said.
He conceded that monetary policy has become a less effective tool in taming inflation as supply inflation is driving up general prices.
The inflation we see now is not demand pushed, its more on the supply side of things. So, it will not work until the world economy and the supply chains stabilises and the Ukraine-Russia situation gets settled.
“It all started when global economies started opening up after the Covid-19 pandemic, the war just exacerbated the situation,” he said.
Chief economist at Investec Annabel Bishop said: “Market worries over high inflation are being increasingly replaced by fears of excessive interest rate hikes that drive economies into recession, and risk sentiment in global financial markets is fragile and significantly risk averse.”
The Johannesburg Stock Exchange followed global markets, which were negative for most of Tuesday. It was down nearly half a percent in intraday trade on Tuesday.
Masilela said: “Worries about a looming recession, the Covid 19 numbers going up in China and surging prices of energy in Europe are affecting investor sentiments.”
Meanwhile, manufacturing production contracted 2.3% in May when compared to the same period in 2021. This was not surprising given the severity of load shedding in recent months. This may be pointing to a lower contribution by the manufacturing sector to second quarter GDP.
Bishop added: “Domestically, severe load shedding has also worried markets over SA’s growth prospects, which in turn risk negatively impacting state finances via revenue generation. Foreigners sold off R3.6 billion of SA equites (net of purchases) in the last two days alone. Load shedding continues in South Africa, with the business day impacted by the harsh stage 4 electricity outages, while the extreme pressure unions brought to bear on Eskom is seen as negative from a political as well as economic perspective.”