South Africa Yields Hit Two-Week Low, Rand Falls as CPI Slows

South African bond yields fell to the lowest in more than two weeks and the rand declined after inflation slowed more than forecast, reviving speculation the central bank will cut interest rates a second time this year.

Yields on the nation’s 13.5 percent bonds due 2015 dropped six basis points, or 0.06 percentage point, to 5.52 percent by 4:40 p.m. in Johannesburg, the lowest on a closing basis since Aug. 6. The rand retreated as much as 0.9 percent, and traded 0.7 percent weaker at 8.3237 per dollar.

The consumer inflation rate fell to a 14-month low of 4.9 percent in July from 5.5 percent in June, Pretoria-based Statistics South Africa said. The median estimate in a Bloomberg survey of 18 economists was 5.2 percent. Traders are adding to bets central bank governor Gill Marcus will cut rates a second time to help spur the economy, interest-rate derivatives show.

“The latest inflation reading will obviously raise the debate about a possible further rate cut by the Reserve Bank before year-end,” Kevin Lings, an economist at Stanlib Asset Management in Johannesburg, wrote in e-mailed comments. Inflation “should not pose a significant concern for the monetary authorities”, he added.

The Reserve Bank cut its benchmark repurchase rate by half a percentage point to 5 percent last month, the first adjustment in 20 months, to help support growth in Africa’s biggest economy. Marcus said on July 29 further reductions are not automatic and should not be taken for granted, tempering expectations of another cut.

Rate Cut

Forward-rate agreements starting in nine months, used to speculate on interest rates, dropped 11 basis points today to 4.81 percent, the lowest this month. The rate is 27 basis points lower than the Johannesburg Interbank Agreed Rate, indicating traders are pricing in more than a 50 percent chance of a rate cut. As recently as Aug. 17, they implied less than a 30 percent probability of a cut.

One-year interest-rate swaps dropped seven basis points to 4.89 percent, the lowest since July 30.

Earlier, the rand dropped after Japan’s trade deficit added to concern slowing growth in Europe and China will curb demand for commodities and a U.S. Federal Reserve official suggested quantitative easing is not a “panacea.”

Japan Trade

Japan’s trade deficit widened in July as shipments to the European Union fell 25 percent from a year earlier, the biggest decline since October 2009, while those to China slipped 12 percent, data today showed. Fed Bank of Atlanta President Dennis Lockhart said U.S. policy makers face a risk of easing too much while trying to spur a “disappointing” three-year-old economic recovery.

“Global growth risks are again front and centre,” Quinten Bertenshaw, a Johannesburg-based analyst at ETM Analytics, said yesterday in a note to clients. “Comments by the Federal Reserve’s Dennis Lockhart last night that more QE would not be a panacea to economic woes are also weighing on markets.”

Three-month delivery copper lost 0.8 percent to $7,550.25 a metric ton on the London Metal Exchange. The contract rose as much as 2.4 percent yesterday, the most since July 3. Currencies of other commodity-producing nations including Australia and Canada also declined.

To contact the reporter on this story: Stephen Gunnion in Johannesburg at sgunnion@bloomberg.net

To contact the editor responsible for this story: Vernon Wessels at vwessels@bloomberg.net

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