The recent weakness in the rand has once more much more to do with global forces than the disappointing news about the the current account of the balance of payments. The pressure on the rand has been matched by the pressure on the Brazilian real, making the rand cost of a holiday on Ipanema beach slightly cheaper than it was in late October.
These increases have not helped the real while they have probably weakened the growth outlook for the Brazilian economy. The SA Reserve Bank is hopefully taking note: higher interest rates do not necessarily protect the currency while they almost certainly restrain domestic spending. It is the growth outlook more than the short term interest carry that drives capital flows, which in turn support a currency and improve the inflation outlook. Sustain growth rates and the currency will be supported. Weaken growth rates and foreign investors are more likely to take their capital elsewhere – even back to the developed world.
