S.Africa’s rand drops on firm dollar, muted reaction to central bank move

By Promit Mukherjee

JOHANNESBURG (Reuters) -South Africa’s currency weakened on Thursday on the back of a strong dollar as the local central bank’s largely expected move to hold its key interest rate steady had a muted impact on the currency.

The rand traded at 17.9700 against the dollar at 1556 GMT, 0.56% weaker than its previous close as the greenback gained after data from the U.S showed the number of people claiming unemployment benefits have fallen.

That sparked concerns the Federal Reserve might continue its rate hike measures after next week’s almost expected 25 basis points hike.

The dollar was trading at almost 0.5% stronger against a basket of currencies.

“The rand weakness was primarily driven by a firmer dollar as markets were largely pricing in a rate hold,” said Warren Venketas, an analyst at Daily FX, referring to the local central bank decision.

The South African Reserve Bank (SARB) held its interest rate steady at 8.25% after 10 consecutive hikes as the country’s consumer price inflation eased to 5.4% this week, back into the target range of 3%-6% of the central bank.

But bank Governor Lesetja Kganyago strongly cautioned against construing the move as a beginning of its rate pause cycle, unlike what many central banks across the world are expected to do.

“Have interest rates peaked? The answer is a resounding no,” he said, adding the current rate reflected elevated inflation expectations and outlook.

Economists are divided on the outlook for inflation.

“We think that inflation will continue to moderate and it will reach the mid point of the bank’s target range sooner than expected,” said Khanyisa Phika, an economist at Alexforbes, a South African financial services firm.

She said interest rates had peaked in South Africa.

The SARB strives to keep inflation at the mid-point of its 3%-6% target range.

Local lender FNB said it expected rate hike cycle to resume as inflationary pressures continue to hover in the midst of widening current account deficit and its funding concerns.

Shares on the Johannesburg Stock Exchange slipped marginally with the benchmark all-share index down 0.08% and the blue-chip index of top 40 companies losing 0.07%.

South Africa’s benchmark 2030 government bond was weaker, with the yield up 5 basis points to 10.355%.

(Reporting by Promit Mukherjee, Tannur Anders and Rachel Savage; Editing by Rashmi Aich, Elaine Hardcastle and Mike Harrison)