Forex Investment and Currency Trading

Evidence is mounting that tight monetary policy is finally slowing the economy.

Business confidence has slumped, house price growth has ground to a halt, retail sales are weak and there has been a modest slowdown in consumer borrowing. Electricity shortages also intensify the risk of a slowdown as rationing is planned while Eskom invests in new capacity.

Potential for a further 100bp in policy tightening to 12% this year is possible, as recent rand weakness reduces the likelihood that inflation will return to target by the end of this year. Break even spreads and survey data also point to higher inflation expectations, which should concern the SARB as the peak in inflation has yet to arrive.

Higher interest rate differentials have been of little help to the rand year to date; and that’s unlikely to change any time soon. As a “commodity currency” the rand will remain vulnerable to slower global growth in Q2-Q3 should commodity prices decline. It will be sold directly and by international investors in the equity market who have bought USD15bn worth of local shares since the end of 2006. That in turn will generate worries about current account financing this year.

Further monetary tightening may raise concerns about political opposition to inflation targeting. Abandonment of the inflation is not expected to target regime, as that would be counterproductive for the economy. But MPs want more regular opportunities to discuss monetary policy and its impact on voters with the SARB, and it wouldn’t be a surprise to see the market fret about the independence of the central bank. MPs are also considering legislative changes which would allow them to change the budget plan. That would undermine the benefits of medium term fiscal planning and influence of Finance Minister Manuel, and generate fears of expansionary policy that could then widen the current account deficit and inflation.