Rand weakens a bit as ECB keeps rates on hold

The rand reversed earlier gains and was weaker against the dollar on Thursday afternoon, tracking a softer euro, which fell after the European Central Bank (ECB) kept its rates on hold.

The rand and local bonds have weakened significantly since the medium-term budget policy statement was presented on Wednesday, although the government’s plans to stimulate growth and tackle fiscal challenges have drawn praise.

One of the biggest concerns for ratings agencies and markets is the fact that the budget deficit is expected to remain between 4% and 4.4% of GDP, said Peregrine Treasury Solutions’ Bianca Botes. “With global interest rates on the rise, government’s growing debt burden threatens to cripple the fiscus, allowing less room for expenditure on key structural economic transformation measures,” she said.

Global focus was on the ECB, which earlier announced it would keep interest rates on hold, and was pressing ahead with plans to phase out its monetary stimulus programmed this year. This was despite mounting risks, including Brexit and conflict over the Italian budget, reported Dow Jones Newswires.

The euro, which the rand usually tracks, was marginally firmer against the dollar earlier but, like the rand, fell shortly after the ECB media conference ended. Analysts had expected ECB president Mario Draghi to highlight risks to the euro, with the statement from the bank somewhat dovish, the newswire said.

Some support for the local currency had also came from a stronger Turkish lira, with that country’s central bank earlier also keeping interest rates on hold, as expected.

Local data on Thursday had little effect on the rand, with producer inflation, as measured by the annual change in the producer price index (PPI), coming in a little higher than expected. PPI rose 6.2% in September, above Trading Economics’s consensus forecast of 6.05%.

While producers are experiencing accelerating average production costs, the extent to which these costs have been passed further along the supply chain has been hindered by a lacklustre demand environment, Investec economist Lara Hodes said.

However, there was an indication in Wednesday’s consumer inflation print that second-round inflationary pressures could be starting to emerge, Hodes said.

At 3.50pm the rand was at R14.5923 to the dollar from R14.5563, at R16.6108 to the euro from R16.5812, and at R18.7505 to the pound from R18.7453. The euro was at $1.1383 from $1.1391.

The benchmark R186 government 10-year note was last bid at 9.39% from 9.31%.

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