Pound South African Rand Exchange Rate (GBP ZAR) Could Spiral On Inflation Data

Published: Thursday, 24 January 2013 09:00 BST - Written by Ben Hughes

STORY LINK Pound South African Rand Exchange Rate (GBP ZAR) Could Spiral On Inflation Data

With all the furore which surrounded UK Prime Minister David Cameron’s ‘euro referendum’ speech, which he delivered in London early yesterday, and the headline-grabbing British unemployment figures, one release received a lot less coverage than was merited – January’s Bank of England minutes. The memos of the UK Monetary Policy Committee’s latest meeting provided room for optimism regarding the world economy’s economic prospects for the remainder of 2013. The minutes noted that there has been a ‘modest improvement in global growth prospects’, thanks to a reduction in the interest rates paid by individual eurozone states to service their national debts and the resolution of the ‘Fiscal Cliff’ drama in the States which played out in the final weeks of 2012.

Ironically, the MPC’s relatively upbeat assessment of the current economic situation many of the world’s major currencies, however the Pound was not one of them. The policy committee’s assertion that the UK’s position remained largely unaltered since their last meeting meant that Sterling failed to gain ground whilst other risk-sensitive currencies including the Australian and New Zealand Dollars as well as the South African Rand hovered up support.

However, it was by no means plain sailing all the way for the Rand. The latest domestic inflation data from Africa’s premier economy, released early yesterday, showed that domestic prices are rising at a faster rate than had been expected. Ordinarily this would spell good news for a currency because of the effect such data has on future interest rate expectations for that currency’s economy. However, South Africa has been riven by social problems in recent months, with internal labour disputes threatening to spiral out of control. The latest South African inflation data, which showed at close to 6.0%, raised the dreaded spectre of ‘hyperinflation’. If the annualised inflation moves into double figures, then further social disorder would be almost guaranteed as savings would lose their value and pay disputes gained their own momentum. In such a circumstance, few investors would be willing to hold Rand-denominated assets.

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