Rand at risk of volatility as South Africa starts policy change

A CHANGE in the way South Africa’s central bank implements monetary policy may lead to greater volatility in the rand.

The transition will start Wednesday night and will see the central bank shifting to a surplus system from its current deficit set-up, meaning commercial banks will be allowed to hold and earn interest on excess reserves.

The South African Reserve Bank will also introduce measures to prevent banks from hoarding liquidity, and thus help maintain an interbank money market, similar to the “tiered floor” framework used by the Reserve Bank of New Zealand and the Norges Bank.

While the change won’t affect the central bank’s inflation target or interest-rate decisions, it may make it easier to speculate in the rand, resulting in wider price swings during times of stress. Elevated ZAR-USD basis-swap rates since the pandemic have made it expensive to short the South African currency.

“The currency basis will