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South African Interest Rate Vs. Dollar Exchange Rate

801 Words4 Pages

SOUTH AFRICAN INTEREST RATES AND THE RAND/DOLLAR EXCHANGE RATE: WHY THE PATH ISN’T ALWAYS CLEAR
INTRODUCTION
When examining the relationship between interest rate levels and exchange rates, one can observe a definite link. The two factors are linked clearly in economic theory, and there is a clear path that one can follow in order to see the effects they have on one another. In practice however, it is not always that simple. Other factors come into play that can disrupt this path, and the real world result often conflicts with the theory. One can clearly see this when looking at the relationship between South African interest rate levels and the Rand/Dollar exchange rate. This essay aims to analyse the effects that the interest rate will have …show more content…

It is positively influenced by South African government bond yields, but the adoption of a free floating exchange rate regime in February 2000 has caused the Rand to be substantially weaker than the US dollar (Hsing and McMillan, 2016). In light of the recent financial crisis, the Rand depreciated by as much as 39,15% against the US dollar. And, since 4 December 2015, the Rand has depreciated by 24,3% against the US dollar (Hsing and McMillan, 2016). All these fluctuations have been caused by many varied differentials, including the interest rate, but not solely because of it. Political unrest has also played a big role in this aspect. With a sample from 1988-2007, Gossel and Biepke (2012) attempted to determine if certain variables, including interest rates, has different effects on the Rand/Dollar exchange rate before and after South Africa’s liberalisation in 1995. The graph below shows the value of the South African rand to the United States dollar from 1975 to 2015, by the blue columns, with the percentage rate of change year-on-year is shown by the black line.

According to this graph, and Gossel and Biepke’s findings, before 1995 a large number of differentials all had statistically significant effects on the exchange rate, and the Rand was very weak against the US dollar. After 1995 however, only the interest rate and net stock share purchases by non-residents had a significant

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