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Rand bounces back slightly after rate hike

Sarb Governor Gill Marcus revealed she was worried about the rand’s performance in 2014.

The South African Reserve Bank board, with Governor Gill Marcus at centre. Picture: Supplied.

JOHANNESBURG - The rand on Wednesday started to strengthen in late trade following the South African Reserve Bank (Sarb)'s decision to increase interest rates by 50 basis points.

The move takes the repo rate to 5,5 percent and the prime lending rate to nine percent.

The currency first weakened and touched R11,36 to the US dollar in the half hour after the announcement.

But it then started to strengthen and stayed around the R11,20 mark.

Reserve Bank Governor Gill Marcus says she was worried about how the rand weakened in 2014.

"Since the previous MPC [Monetary Policy Committee] meeting, the rand has depreciated by about 7.4 percent against the US dollar, by nine percent against the euro and by eight percent on a trade-weighted basis. Year-to-date, the rand/dollar depreciation has been about 3,5 per cent," she explained, saying further drops would bear heavily on the local economy.

She said this could drive up inflation, particularly with regard to the fuel price, hence the need for the rate hike.

But with a positive response in the currency market so far, Marcus is no doubt relieved for the time being.

However, the US Federal Reserve is due to make its own announcement late on Wednesday.

It is expected to commence further tapering of its quantitative easing programme.

The stimulus has helped increase capital flow globally but is expensive to maintain for an improving US economy which no longer needs it.

"In the longer run, a sustained recovery in the US should be positive for the global economy in general, but the adjustment to the withdrawal of quantitative easing is likely to create significant short to medium-term challenges," Marcus warned.

ETM Analytics Managing Director and economist George Glynos says fighting inflation is only part of the Sarb announcement, saying the currency is as much of a significant factor.

"Inflation, put in another word, is a loss of purchasing power in your currency, otherwise also reflected in the weakening of the rand," he explains.

"We do need to try and protect the value of this currency and certainly with the interest rates as low as they've been, they have fostered some significant imbalances in the South African economy."

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