Rand and Prime prospects

FNB Rex Column, by Cees Bruggermans

Many things are muddling the Rand outlook this year and next. Will the Rand still firm, or start a new weakening cycle, and can it differ per major currency?

The Rand should still firm nearer or even below 7:$, except that a ‘strapless bra’ condition seems to be holding up the Dollar.

The near zero US short-term interest rates offer no return on cash, encouraging capital outflows from the US, as was the case for much of last year, potentially weakening the Dollar and firming the Rand.

Reserve Banks says rate gap is 'immaterial'

The South African Reserve Bank on Thursday said the gap between the repo rate and the prime rate did not affect the cost of borrowing for consumers, contradicting unions who claim consumers are not fully benefiting from lower interest rates.

The prime rate is used by commercial banks as a benchmark when pricing loans and is 3,5 percentage points above the repo rate.

Since December 2008, the central bank has cut the repo rate -- the rate at which it lends to commercial banks -- by 550 basis points to 6,5%, and banks have lowered the prime rate.

But South Africa's powerful unions say consumers have been unable to benefit fully from lower rates because of the 3,5 percentage point margin and want the gap to be narrowed.

Welcoming the rate cut and prime 10%

FNB Rex Column, by Cees Bruggermans
 

It isn’t as if the economy now only has tailwinds blowing its recovery along.

The Minister of Finance will be reducing his budget deficit for a number of years in part by slowing growth in government spending. That’s a headwind.

The Rand has gained ground over the past year and the global forces driving it may not be finished. That’s a headwind, too.

Then there is the matter of heavily loading public tariffs – electricity, tolls. These are taxes by another name. That’s more headwind.