Worries over South Africa’s economic outlook have continued to pressure the Rand, with the second quarter business confidence index plunging sharply. The index dipped from 40 to 29 as domestic sentiment continued to deteriorate. Signs of instability and infighting within the ruling African National Congress (ANC) are keeping business in a more pessimistic mood, particularly as the threat of further credit rating downgrades hang over the economy.
Sterling came under pressure, meanwhile, as a combination of rising inflation and weak wage growth pointed towards a deepening squeeze on consumer finances. Given that strong levels of spending have helped to drive economic activity in the wake of the EU referendum this left GBP exchange rates on a weaker footing. With inflation already running well above the Bank of England’s (BoE) target range and growth in the wider economy weakening investors took a more pessimistic view of the domestic outlook.
The GBP ZAR exchange rate jumped sharply on Thursday, however, after the BoE proved unexpectedly split at its latest policy meeting. As three policymakers voted for an immediate interest rate hike demand for the Pound surged, with markets encouraged by the suggestion of a shift towards a hawkish policy outlook. Even so, as the majority of the Monetary Policy Committee (MPC) still shows no inclination to return to a tightening bias the chances of interest rates rising from their current lows are rather limited. As a result, Sterling soon lost its initial upward momentum as investors reassessed the implications of the meeting.
Rand Weighed Down by Political Row over SARB Mandate
Confidence in the Rand weakened further at the start of the week as a row broke out over the remit of the South African Reserve Bank (SARB). The country’s anti-corruption watchdog called for the central bank’s mandate to be changed, focusing on promoting ‘balanced and sustainable economic growth’ rather than concentrating on inflation and currency stability. This was seen as a challenge to the independence of the SARB, creating a fresh sense of uncertainty and worry that saw the Rand sliding lower across the board on Monday.
However, the Pound struggled to hold onto all of its gains against the Rand for long thanks to the latest comments from BoE Governor Mark Carney. Unsurprisingly, Carney maintained his dovish policy outlook and noted that this is not the time for interest rates to rise. This indicated that the MPC is likely to remain on hold for the foreseeable future, in spite of Thursday’s split vote. The appeal of the Pound weakened in response, particularly as the Governor also issued a warning over the potential negative impact of Brexit to come.
Persistent Brexit Jitters Forecast to Limit GBP ZAR Gains
Although no change is forecast for May’s South African inflation rate this still has the potential to trigger a fresh bout of volatility for the Rand. Any weakening in inflationary pressure could encourage investors, indicating that the central bank is likely to leave monetary policy unchanged at its next meeting. If the row over the mandate of the SARB continues to intensify this could keep ZAR rates under significant pressure in the near term, overshadowing any positive domestic data.
With the formal Brexit negotiation process finally under way the Pound is likely to remain biased to the downside. Should tensions between the UK and EU officials start to mount once again the GBP ZAR exchange rate could return to a downtrend. Even though the Conservatives appear close to securing a confidence and supply arrangement with the controversial Democratic Unionist Party (DUP) a sense of political instability also looks set to persist.