South African bond yields plunged to a record as the manufacturing and mining industries unexpectedly contracted, adding to speculation that the central bank will cut interest rates.
Mining production, which accounts for more than half of South Africa’s exports, fell 3.5 percent in March from a year earlier, while manufacturing shrank 2.2 percent, Statistics South Africa said in separate reports today. Reserve Bank Governor Gill Marcus has left the central bank’s benchmark repo rate unchanged at 5 percent since a surprise 50 basis-point cut in July. Forward-rate agreements are pricing in an 80 percent probability of monetary policy easing this year.
“Traders are increasingly expecting a rate cut,” Gareth Robertson, a member of Nedbank Group Ltd. (NED)’s institutional flow sales team, said by phone from Johannesburg. “People are still looking at the global situation and building expectations.”
Yields on 10.5 percent bonds due December 2026 dropped 15 basis points, or 0.15 percentage point, to 6.60 percent by 4:44 p.m. in Johannesburg. Forward-rate agreements starting next February fell six basis points to 4.75 percent, 38 basis points below the Johannesburg interbank agreed rate. The rand gained 0.2 percent to 8.9920 per dollar.
Rising unemployment and the mining and manufacturing slump are pressuring Marcus to bolster an economy struggling to recover from lower commodity prices, waning demand for exports from Europe and labor unrest. The Reserve Bank of Australia cut its main rate May 7 to a record, while European Central Bank President Mario Draghi said May 6 that further rate cuts are possible after reducing them to an all-time low last week.
Factory output in Africa’s largest economy declined after revised contraction of 2.8 percent in February, Pretoria-based Statistics South Africa said. The median estimate in a Bloomberg survey of 14 economists was 1.8 percent growth. Mining production, which was estimated by economists to have increased 4 percent in March, slid from 7 percent in February as gold, copper, coal output declined.
The production-side of the “economy is under a lot of pressure,” Kevin Lings, an economist at Stanlib Asset Management Ltd., said by phone from Johannesburg. “If you combine that with the global environment, with central banks globally cutting rates, it would suggest that the Reserve bank has scope to cut. This will certainly give the Reserve Bank a lot of debating points.”
Stanlib Asset Management, which manages the equivalent of $50 billion, maintains interest rates will remain on hold all through next year, he said. The Monetary Policy Committee meets on May 23 to review borrowing costs.
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