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Interest rates set to remain as rand battles the dollar

by Luqmaan Rawat
Interest rates will remain and likely get higher as the rand competes against the dollar

South Africa – The world is currently experiencing elevated levels of inflation which in turn has caused countries to raise interest rates. This is the reason why the rand has been doing well against the US dollar. However, the United States has also begun to raise interest rates, and this could be significant to the depreciation of the rand.

The US dollar is by far the most important currency in the world for several reasons. Everything centres around the dollar. When the dollar goes up it usually brings things down and vice versa, explained Dawie Roodt, economist.

“Whatever is happening to the US dollar is important to all of us. If the dollar appreciates, for example, that means the rand will usually fall in value.”

The reason for the United States raising interest rates

South Africa is currently experiencing high inflation rates. However, it is still relatively low compared to the inflation rate in the United States. For this reason, the United States have decided to increase their interest rates, explained Roodt.

“When you increase interest rates, what usually happens is that you make your currency more attractive and that usually supports your currency. What we have been seeing in America in the last couple of months is that they have started increasing interest rates. In the process the US dollar has been strengthening and the rand, amongst others, have been falling in value.”

There is an indication from the United States bank that interest rates will continue to rise. This in turns means the rand and other currency will likely become weaker against the dollar. However, these things are not static, and anything can happen to shift the value of the rand to the dollar.

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Side shows that are important in the value of the rand

Besides the United States raising their interest rates, there are other factors to consider when it comes to the value of the rand. The one factor is the high commodity prices and the second has to do with the South African Reserve Bank (SARB), explained Roodt.

“Commodity prices are rather high like the oil price and platinum prices. That is mostly good for South Africa. High oil price is not good for South Africa, but other commodities is usually good for South Africa because we export stuff. We’re exporting more than what we are importing at the moment and that means there’s a net inflow of money into South Africa and that supports the exchange rate of the currency at the moment.”

The second factor has to do with SARB. For Roodt, it was the right decision by SARB to increase the interest rates quite earlier in the cycle. That will support the rand and it is very likely they will continue to increase to help the rand stay steady over the course of the next few months.

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Nationalising of the SARB

There were talks of nationalising SARB during the ANC Policy Conference. Roodt, who is a shareholder of SARB, believes not much will change if it happens. If there is any change to happen, it would probably be worse.

“If you want to change that, if you want to take my shareholding away and nationalise my shareholding nothing is going to change. The president will continue to appoint the governor at the reserve bank. They are still independent because that’s what the constitution says. It says they can make decisions on interest rates, and I have no say over that. The message that is going to be sent is that the government wants to get closer to the reserve bank and that’s a bad message. Politicians always misuse that message.”

For now, South Africans should not expect interest rates to go down anytime soon. They should actually prepare for it to possibly increase as the SARB tries to maintain the rands value against the dollar. In the coming months, it is very likely that both banks will increase their interest rates to attract investors and increase the value of their currency.

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