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Why Interest Rates are doing nothing for the rand right now

by , 18 June 2021
Why Interest Rates are doing nothing for the rand right now
Q. “I refer back to Monday's article. You mentioned that the main reason for the rand's rally was based on global reasons rather than local. Don't you think South African interest rate changes could have an effect on the rands strength too?”

 
A. As there is no clear-cut answer, I can only speak from my economic background and experience.
 
Generally, when interest rates rise, people deposit more money into savings, bonds and banks.
 
This has a deflationary effect over time, where consumers tend to spend less of their money on actual products. The currency then tends to strengthen as there is less spending going on.
 
When interest rates drop, people take their money out of their savings and banks and into things like stocks, property and other assets.
 
This causes an inflationary effect, over time, which leads to a higher demand which weakens the currency as there is more spending…
 
However, these interest rate effects take a lot longer period of time to filter and price the events in with the currency (i.e. the rand).
 
Sometimes it can take up to eight months, before we see the fundamental interest rate decisions having an impact on the currency… And when I make my predictions, they are only based on the NOW (two to three months maximum analysis).
 
And if we consider that the SARB (South African Reserve Bank) has left the interest rates unchanged at 3.5% for the fifth time…
 
It means, that we won’t see much of an impact on the rand with the reserve banks leaving the interest rates as they are.
 
Therefore, I don’t believe the local factors have anything to do with the current rands strength… Only the international factors, which you can read more here…
 
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Why Interest Rates are doing nothing for the rand right now
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