South African bonds surged, sending benchmark yields to the lowest on record, and the rand weakened after the central bank unexpectedly cut its benchmark interest rate, citing lower inflation and risks to economic growth.
Yields on the nation’s 13.5 percent bonds due 2015 dropped as much as 35 basis points to 5.42 percent. The notes yielded 5.46 percent as of 4:51 p.m. in Johannesburg, a record low on a closing basis, according to data compiled by Bloomberg. The rand retreated 0.3 percent to 8.1868 per dollar, reversing a gain of 0.5 percent in earlier trading.
The Monetary Policy Committee of the South African Reserve Bank lowered its repurchase rate to 5 percent from 5.5 percent, the first cut since November 2010. Sixteen out of 18 economists in a Bloomberg survey expected Governor Gill Marcus to leave the rate unchanged. Policy makers cut the repurchase rate for the first time since November 2010, joining central banks in India, Brazil, China and Europe in reducing borrowing costs this year to protect their economies from slower global growth.
“The market started racing as if it is pricing in another rate cut,” Ian Cruickshanks, head of treasury strategic research at Johannesburg-based Nedbank Group Ltd., said by phone. “There is no doubt that they’re emphasizing a much bigger risk for the economy than there is to inflation.”
Marcus was provided the room to ease monetary policy after inflation eased to a 10-month low in June, slowing further from the top end of the 3 percent to 6 percent target range.
Inflation slowed to 5.5 percent in June from 5.7 percent a month earlier, the statistics office said yesterday. At the same time, export demand is coming under pressure amid a debt crisis in Europe, undermining growth in Africa’s biggest economy. The government cut its forecast for economic growth this year to 2.7 percent, the slowest pace since a recession in 2009. The Reserve Bank also lowered its forecast to 2.7 percent for this year.
“The MPC is concerned about the increased downside risks posed to the domestic economy from global developments,” Marcus said in a televised statement. “The MPC also considered the inflation environment to have improved somewhat.”
Forward-rate agreements, used to speculate on interest rates, indicate investors are pricing in another rate cut by year-end. Contracts starting in December dropped 39 basis points to 4.82 percent, the lowest on record, according to data compiled by Bloomberg. The rate implies about a 36 percent chance of another cut.
“They got so bearish so fast on the spill over of the euro zone economy,” Peter Attard Montalto, an economist at Nomura Plc in London, said in a telephone interview after the decision. “They have clearly been surprised by the downside of inflation and with the external growth worries, that has opened the door for cuts now.”