Higher prices concern as rand drops to record low
The rand’s slump to a record low against the dollar on Monday after a 15% depreciation this year may force interest rates higher and lead to food price increases.
Global markets shuddered downwards on fears of lower economic growth in China on Monday, forcing the rand even lower against the dollar as foreign investors exited commodity-linked currencies.
It’s bad news for South African consumers as the prices of imported goods, food, and payments to reduce and buy debt now seem likely to all increase in the next few months.
Forward-rate agreements, used by traders to speculate on interest rates, were pricing in at least a 25 basis points interest rate increase at each of the Reserve Bank’s next two interest rate policy meetings.
Before the rand’s fall to R14 per dollar, the predictions were only a 50% probability of an increase next month. However, the rand fell as much as 8.5% to R14.07 per dollar.
“They’ll probably be forced to hike interest rates just to keep the rand from weakening even further,” said Ion de Vleeschauwer, chief currency dealer at Bidvest Bank.
The continuing decline of the rand against the dollar will lead to higher food prices, the Pietermaritzburg Agency for Community Social Action (Pacsa) said.
Pacsa regularly collects data on a basket of foodstuffs to monitor how the prices impact consumers.
Although it is not able to determine the exact impact of the currency on food prices, a combination of the drought and depreciating rand “will definitely impact certain foods in the basket in the next month or so”, said Pacsa director Mervyn Abrahams.
Food inflation has been relatively low this year, but Abrahams said the drought had forced SA to import more food, which is paid for in dollars.
In addition, the major food commodities grown here, such as maize and wheat, tend to trade close to global dollar prices due to import parity pricing.
Maize and wheat are also big components in the cost structures of other foods; for example, they are used as feed for chicken and cattle farming.
“The food price increases are likely to be broad based,”said Abrahams.
“We need to look at some form of additional storage for basic agricultural commodities such as maize and wheat so that we can reduce the impact of these cycles,” he said.
The Reserve Bank raised its benchmark repurchase rate by 25 basis points to six percent in July, the first policy move in a year, to help fight inflation, which accelerated to five percent last month.