On May 25, the exchange rate between the South African fiat currency and the U.S. dollar experienced a significant decline, reaching a new record low of 19.7640 per dollar.
This drop occurred shortly after the South African Reserve Bank raised the benchmark interest rate to 8.25%, its highest level since 2009. Just two weeks before, the currency had hit a new all-time low of 19.51 units of the Rand per dollar.
At that point, the drop was attributed to allegations by the United States that South Africa had supplied weapons to Russia, which invaded Ukraine in February 2022. The allegations have sparked concerns that the United States could potentially restrict South Africa’s access to the preferential duty-free market provided by the African Growth and Opportunity Act (AGOA).
Apart from the allegations made by the United States, the South African economy has been significantly impacted by worsening electricity shortages and increasing inflation. These additional factors have further destabilized the economy of South Africa.
To address the declining state of the economy, the South African Reserve Bank (SARB) has taken a proactive approach by implementing an aggressive monetary policy. As part of this strategy, the SARB has recently implemented consecutive interest rate hikes of 50 basis points each, which is considered significant as it marks the first time such consecutive rate hikes have been carried out since 2009.
With the most recent increase, the cumulative rate hike since November 2021 now stands at 475 basis points.
According to a Bloomberg report, a prediction model indicates that following the rate hike, the probability of the South African Rand surpassing the 20 units per dollar threshold has increased to 53%. This suggests a heightened risk of the Rand’s value depreciating against the US dollar.
Prior to the South African Reserve Bank’s latest rate decision, the same prediction model had estimated the probability of the Rand breaching the 20 units per dollar level at a mere 6.8%.
At time of writing, the Rand is at 19.77, with predictions that it will breach 20 in June 2023.
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