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Why the rand's plunge won't send inflation soaring

by , 19 August 2015

The rand has been on a downward trend this year. And over the past couple of weeks, the currency has been under even more pressure.

So what's going on with the rand? And does a weaker rand mean much higher inflation and interest rates?

Read on to find out…

The rand is trading at 14 year lows

The rand is currently sitting at levels not seen since 2001. The situation doesn’t look likely to change any time soon.

The local unit is lacking support and when the US Federal Reserve eventually hikes interest rates, the rand “will weaken even further,” reports BDLive. The rand has suffered as the dollar continues to strengthen and China devalued its currency amidst a number of “negative local economic fundamentals”.

The rand fell ever closer to R13 to the dollar yesterday, but the Reserve Bank isn’t concerned about the currency’s weakness.

The impact of a weaker rand on inflation

This is because a weaker rand has a “more muted effect on prices” than it has in the past, says Fin24. This is mostly thanks to “weak demand in the economy and increased competition among retailers”.

The lower oil price is also helping to keep inflationary pressures at bay, adds Fin24. This means that the Reserve Bank isn’t under pressure to hike interest rates as the fragile economy deals with “power shortages, falling commodity prices and strikes”.

The South African Reserve Bank’s target band for inflation is between 3% and 6%.

Old Mutual Wealth’s chief investment strategist, Dave Mohr, says that core inflation has remained quite stable, reports IOL. This “shows that the economy is less inflationary than what traditional models show”.

Later on this morning, Stats SA will release its consumer inflation data for July.

At time of writing, the rand was trading at R12.89 to the dollar, R14.26 to the euro and R20.20 to the pound.

But the short-term future for the rand looks bleak. When the US hikes interest rates, the rand is going to come under yet more pressure.

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Why the rand's plunge won't send inflation soaring
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