Would high interest rates offset the issue of keeping money in a weak currency?

Question

I am a UK resident and recently I managed to unlock an account in South Africa with FNB that my family had set up for me. The account is worth R90k (~£5k). I have no intention of moving back to South Africa or spending the money there. I want to be able to use the money in the UK eventually.

Currently my FNB account is in a 12 month fixed deposit account that offer 7.60% nominal interest rate. My bank in the UK is HSBC and they offer a whopping 0.85% AER/Gross for a 12 month fixed deposit account.

Obviously FNB offer a better interest package but the issue is the South African Rand is an extremely weak currency compared to Pound Sterling. Every year the Rand is worth less and less.

So would it be better for me to keep the money in South Africa or would the interest gains be wiped out by the fact the Rand gets weaker by the year, and therefore would be better for me to transfer the money to the UK?

Answer 1

So would it be better for me to keep the money in South Africa or would the interest gains be wiped out by the fact the Rand gets weaker by the year, and therefore would be better for me to transfer the money to the UK?

This is opinion based.

Generally you are right, the high interest rates in a country is off-set by the currency rates on a long term average basis. This is factored by markets and influences both the local interest as well as the Fx rates. In an ideal world; there would be no gain by this move.

However there are local inefficiencies, and at certain periods, they are not in line; i.e. they can be beneficial or become worse. This is always temporary and things will get aligned.

What would happen in specific situation of your's; i.e. should you keep it for 5 years [x years] and would it beneficial is opinion based and can't be predicted.

General rule of thumb is if you don't plan to stay in a country; you shouldn't keep funds there as it is unnecessary risk to factor in; plus nightmare to comply maze of tax regimes, etc.

If investment portfolio is large, as a diversification strategy, one can still invest directly or indirectly into other geographies. But we are not talking about that scenario in this case.