Deputy governor raises concern on carry trade

SOUTH Africa's Reserve Bank deputy governor expressed concern yesterday over the effect of interest rate carry trades on the rand and said the phenomenon could constitute a big challenge in the future if not properly managed.

SOUTH Africa's Reserve Bank deputy governor expressed concern yesterday over the effect of interest rate carry trades on the rand and said the phenomenon could constitute a big challenge in the future if not properly managed.

"We've seen significant capital flows coming to countries such as South Africa and causing the currencies to strengthen," Renosi Mokate told a leadership conference.

"One of the reasons for this is that you have very low interest rates in advanced economies.

"This is obviously having an unintended consequence for emerging markets and these are challenges going forward because there's a potential for another crisis to occur if appropriate leadership is not exercised," Mokate added.

At 7,0percent, South Africa's repo rate is much higher that those in developed economies, which are at record lows after monetary loosening during the recession last year.

The rand gained about 30percent against the dollar in 2009 after hitting 7,27 against the dollar on Wednesday, just a touch off this year's firmest level of 7,25. It was trading at a two-year high against the euro (at R9,98) yesterday.

The rand's gains have raised concerns that it could undermine the manufacturing sector, a key sector in the economy.

Cosatu has called on government to take measures to weaken the currency.

Despite its concerns, the government has repeatedly said it would leave the currency's levels up to the market.

The central bank has said it will continue to accumulate foreign exchange reserves when appropriate but will not target a level for the rand. - Reuters

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