THINGS have got so bad in South Africa that one of the fundamental laws of monetary policy is beginning to weaken, and even break. A crippling energy crisis, a low growth environment and deteriorating fiscal metrics combined to push the rand to a record low last week.
But the normal response of raising interest rates to defend the currency may prove counterproductive, undermining a fragile economy and pushing the rand even lower, according to economists at Goldman Sachs International.
The South African Reserve Bank wants to support the rand to cut the cost of imports and ease pressure on inflation.
Tighter monetary policy risks “creating a feedback loop for the rand,” Andrew Matheny and Bojosi Morule wrote in a note to clients. “The risk of overtightening in the face of FX pressure is real and could ultimately undermine the Sarb’s policy response.”
The rand on Friday reached R19.51 per US
You’ve reached your free article limit
Subscribe to enjoy unlimited access to trusted journalism. Cancel anytime.
Subscribe nowNeed help? molokom@insidepolitic.co.za
