THE rand’s latest lurch weaker has dashed any hope that the Reserve Bank will cut interest rates at its monetary policy meeting next week. Few were expecting the step anyway, for a variety of reasons.
Interest rates are already at record lows and there is little that another reduction could do to boost employment or support the struggling sectors of the economy — mining and manufacturing.
What a rate cut could do is spur domestic consumption, which is the main engine of growth at the moment. But consumer spending is holding up relatively well, and lower interest rates would only spur demand for credit, which is not what the economy needs.
Households are already heavily indebted and should be deleveraging rather than borrowing more, especially in the face of an explosion of unsecured credit. A weaker currency fans inflation by making imports — particularly oil — more expensive, and higher prices will reduce the purchasing power of consumers, who are already pressured by the rising cost of essentials such as electricity and fuel.
Lower interest rates would only lead to further depreciation in the rand by reducing demand for local assets, particularly from foreign investors. It already seems likely that the rand will extend its losses in the face of the range of negative factors operating at the moment.
First and foremost, there is rising global "risk aversion" triggered by Europe’s debt crisis and the proximity of the US "fiscal cliff" — a phrase describing a combination of expiring tax cuts and spending reductions due by January.
Second, there is South Africa’s widening deficit on the current account, its broadest measure of trade in goods and services. The shortfall is financed mainly by foreign purchases of local bonds and shares, which appear to be waning as a result of spreading risk aversion.
Labour unrest is another deterrent to those portfolio inflows, which are also known as "hot" money due to their volatility.
Lower prices for South Africa’s key mineral exports, coupled with waning global demand for those products, compounds the problems for the trade and current account deficit.
If these shortfalls are not adequately covered, they will put more pressure on the rand to weaken, pushing inflation higher and making life more difficult for South Africa’s hard-pressed households. The rand is trading near a three-year low at about R9/$ and if that level is broken it will depreciate further.