The rand slumped deeper into the red yesterday as the dollar strengthened after the US Federal Open Market Committee (FOMC) minutes confirmed a further tightening of monetary policy amid accelerating inflation, and fears of a global recession.
The domestic currency weakened to R16.86 during early trade, its weakest since August, 2020 pressured by the dollar’s strength and the dampening sentiment over ongoing power cuts in South Africa.
The rand is also at risk of further weakness as the US continues to show a strong resolve of reducing inflation.
The US FOMC June policy meeting indicated that the central bank could raise interest rates at their next meeting in July by either 50 or 75 basis points.
The minutes from the FOMC policy meeting on June 14 and 15 underscored that US Fed officials were increasingly concerned that the elevated pace of inflation is becoming quite persistent.
According to the minutes released late on Wednesday, the US Fed took a hawkish stance and said that a 75 basis points hike in interest rates would likely be appropriate at this month’s meeting, even if this might push the US into a recession.
The Fed has been ramping up its drive to tighten credit and slow growth, with inflation having reached a four-decade high of 8.6 percent.
Recession headwinds have increased as the Fed was more aggressively front-loading rate hikes due to very sticky and elevated inflation.
The markets have been betting against emerging markets’ currencies that the Fed will raise rates again this month, after hiking them by 75 basis points last month.
Oxford economics chief US economist, Kathy Bostjancic, said that FOMC members reasoned that the extremely tight labour market warranted a rapid move to a restrictive policy rate given the continued rapid rate of inflation.
Bostjancic said the Fed’s minutes supported their view that the Fed is poised to raise the policy rate another 75 basis points at the next policy meeting on July 26 to 27.
“The main reason is that we expect the rate of inflation to remain stuck around 8.5 percent year-on-year for the consumer price index in June,” Bostjancic said.
“If inflation undershoots our forecast, then the Fed might scale back to a 50 basis points rate hike, but it will still be aiming to get the Fed funds rates to at least neutral very quickly – officials forecast the long-run neutral rate is 2.5 percent.”
Meanwhile, South Africa’s higher-than-expected inflation of 6.5 percent in June pointed to a further interest rate hike in July.
The South African Reserve Bank in May unveiled its biggest rate increase in more than six years, and signalled further rate hikes in the context of the gradual policy normalisation.
Investec chief economist Annabel Bishop said that more recent data showed inflationary pressures were still high, but with a further weakening in demand.
Bishop said that as a result, the FOMC had moved away from a focus on normalising monetary policy to likely a restrictive stance.
“Risk-off is likely to remain a feature of global financial markets, and a slowdown in global demand is anticipated, with risks of recession rising on an aggressive rate tightening overshoot,” Bishop said.
“The US 10-year Treasury yield rose and there is pressure on South Africa’s rates too.
BUSINESS REPORT ONLINE