The SARB deputy governor and many economic commentators are saying that the SARB will probably raise its repo rate at its next meeting at the end of January to stabilise the falling Rand. But raising the repo rate to stop the Rand depreciating against the dollar is like using a rock to kill a mosquito on your head. The bank should be using its reserves instead as that is what they are there for.
Raising the repo rate would be crazy when we have near negative real growth (the last 2 quarters growth were -1,3 and 0,7% respectively), and 30% unemployment: Each 1% rate hike pulls R31bn more from the economy each year (money that could have been spent on your businesses), and slows the economy, creating more unemployment poverty and inequality.
In effect, raising interest rates sucks billions from the poorest South Africans (who have nothing to do with the Rand’s decline) in order to ensure that the people causing the Rand’s decline (foreign speculators pulling their investments from SA and some local savers sending their money overseas) get enough returns to keep their money here.
The Rand depreciation has nothing to do with demand side inflation (caused by rising wages and increased borrowing), and demand side inflation is the only reason the SARB should ever raise rates. The SARB has stated that inflation in SA (4,7%) is currently mostly supply side, and the repo rate does not affect supply side inflation.
As of the 31st December 2015, the SARB had R714bn in reserves which exist specifically to stabilize the currency and prevent its slide. But last year the SARB governor stated that the reserve bank would not defend the Rand (This statement itself does not inspire confidence in the Rand and therefore aids in the Rand’s decline).
A look at the changes in the total SARB reserves during December show he was serious: According the the SARB figures, their foreign exchange, gold and SDR reserves all increased in the month of December 2015 from a total of US$45,1bn to US$45,8bn , which means that during last month’s political turmoil and Rand depreciation of 8% the SARB actually increased its reserves by US$640 million. (If they had tried to defend the Rand by selling those reserves to buy excess Rands those reserves would have decreased not increased).
What is the reason for the SARB’s R714bn in reserves of they don’t use them as intended? If we are not going to use them to stabilize the Rand then let’s use them to pay off 1/3rd of our government debt (around R2tn) and save ourselves the interest payments on that debt which add to the Rands decline anyway! At the very least let’s pay of our foreign denominated debt which is increasing radically as the Rand declines.
Because of the recent ratings downgrade to almost junk (blamed on slow growth) the South African government is borrowing at very high interest rates, while the SARB has a “conservative and risk-averse” approach when investing its reserves, which implies that it is receiving low yields on its $45,8bn reserves. If this is the case then having reserves that we are not using as intended is costly and imprudent, as it results in higher debt, more flow of wealth out of the country than inflow, and thus (ironically) a weaker Rand.
Perhaps it is time to consider exchange controls or taxes to limit currency speculation.
The falling Rand might not be such a bad thing, as it means more profit for exporters and makes local manufacturing more competitive and thus leads to the creation of jobs. But that job creation becomes less viable if local people have less money to invest in businesses and less to spend on those businesses’ products and services because the SARB has raised rates to kill demand.