South Africa's rand, bonds rally after central bank cuts rates

JOHANNESBURG: South Africa's rand rallied against the dollar on Thursday and bond yields fell after the central bank cut its main lending rate by 25 basis points in a widely expected move to counter floundering economic growth.

At 1600 GMT, the rand was 0.93% higher at 13.8825 per dollar after closing at 14.0125 in previous session.

The South African Reserve Bank (SARB) cut rates by 25 basis points to 6.5% in a unanimous decision, its first easing since March 2018, although it struck a cautious tone suggesting future reductions to borrowing costs were not a foregone conclusion despite benign inflation.

"Current domestic conditions unequivocally favoured the SARB cutting rates, especially with the global macro climate of monetary policy easing meaning any rate cut will likely have a muted impact on South African assets," said market analyst at Monex Simon Harvey.

The reaction in the rand was tame by historical standards, he added.

Growth in Africa's most industrialised economy contracted by a surprise 3.2% in the first quarter, swelling calls for the bank to do more to support consumer spending and corporate activity.

But in a media briefing on Thursday the bank poured cold water on the long-term impact of lower lending rates, saying the weak economy was linked more to fiscal policies and a rate cut could only have a short term effect.

The US Federal Reserve is set to lower rates at its own policy meeting next week, a move likely to spur demand for higher-yielding emerging market assets, although South Africa's now lower lending rate may limit interest.

Traders said the rand in the meantime would likely see some increased volatility as investors looked for quick gains.

Bonds also crossed a crucial psychological mark, with the yield on benchmark 2026 government bonds dipping below 8% to 7.975%, 5 basis points lower on the day.

Stocks closed higher, with miners, retailers and financial firms, all of which benefit from the interest rate decision or its effect on the rand, topping the Johannesburg Stock Exchange's blue-chip index.

The JSE Top-40 index rose 0.33% to 51,733 points and the broader all-share index closed 0.37% higher at 57,847 points.

Among top-40 companies, the biggest gainer was British American Tobacco, up 5.9% on the back of rival Philip Morris' better-than-expected second quarter earnings and improved full-year outlook.

Anglo American Platinum's performance was also boosted by positive second quarter results, lifting the stock 3.4%, with fellow miners AngloGold Ashanti, Goldfields and Exxaro close behind.