(Bloomberg) -- The rand’s plunge to the weakest in almost seven months against the dollar may push up South African inflation and require interest-rate increases, central bank Deputy Governor Kuben Naidoo said.
While the South African Reserve Bank doesn’t target a specific level of the rand, it responds to second-round effects on prices from currency weakness, Naidoo said in an interview with Bloomberg TV in Sintra, Portugal, on Tuesday.
“If we do think there is a risk of second-round effects, we will have to act,” he said. Inflation was 4.5 percent in April, in the middle of the central bank’s target range. “But if it rises and if it’s forecast for rise, we will have to act.”
The Reserve Bank held its key rate at 6.5 percent last month after cutting in July and March, citing the cost of oil and wage increases as risks to the outlook for the pace of price increases. It sees inflation staying in its target range of 3 percent to 6 percent until at least the end of 2020. A government report on Wednesday will probably show the rate increased to 4.6 percent in May, according to the median estimate in a Bloomberg survey.
Forward-rate agreements starting in six months, used to speculate on borrowing costs, show traders are now pricing in a 66 percent chance of a 50 basis-point rate increase before the end of the year.
After strengthening to a three-year high against the dollar following Cyril Ramaphosa’s ascent to the presidency, the rand has wiped out all those gains and at 13.7231 per dollar at 7:13 a.m. on Wednesday, it’s at levels last seen in early December. That adds to price-pressure risks, with inflation expectations -- as measured by the five-year breakeven rate -- now at the highest level in seven months.
The effect of the rand on prices will depend on how long it remains weak, Naidoo said.
“If you have much weaker currency persisting for a long time, it will have a much greater likelihood of causing inflation,” he said. “If the currency is back to 12.50 in a month’s time, it will have a much lower chance of causing inflation.”
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