Friday, August 13

Interest Rates

Well, the South African blogosphere has had time to absorb the interest rate cut. Wayne thinks that this will mean that the Rand will weaken and inflation rise. Fodder think Mboweni buckled in the face of pressure.

My own opinion is that I don’t think that the link between the Rand and interest rates are as strong as it use to be. Our money markets are still very attractive, and dollar weakness has been the reason for the low exchange rate. Not Rand strength.

I don’t believe that the Reserve Bank believes that there is a strong link either. However, by dropping the interest rate they remove a lot of political wind from the proponents of stricter Rand control. They also relax the reign on the economy a bit more giving us hopefully a slight growth spurt, and unless this 50 basis point drop causes a dramatic tumble in the rand it is unlikely to affect inflation nearly as much as the sky-high cost of petrol, which is out of our control anyway.

I think this was a smart move politically for Tito Mboweni, and I’m sure the economists in the Reserve Bank are not overly worried by the consequences of this move. If the Rand weakens, Tito wins because he is seen to be saving the manufacturing sector. If the Rand stays the same or only weakens slightly (Even 10% would beinsignificant given the fluctuations of the Rand we've seen the last few years) Tito wins because the case for Reserve Bank intervention is weakened.

Update: The Rand is currently at R6.45 to the Dollar and R7.89 to the Euro. This is still easily within the the range it has been trading for the last few months.


Anonymous Anonymous said...

I agree that interest arets don't have much to do directly with a currency and the reaction yesterday was more due to the surprise factor. As stated I expect teh strong Rand to continue improving largely due to a weaker US$.

That said there is a school of thinking that says the Rand is strong due to interest rate differences and "hot money". Frankly I don;t really buy that thoery much.


13 August 2004 at 15:03  
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