JOHANNESBURG: South Africa's rand rallied more than 1 percent on Thursday after the central bank raised benchmark lending rates for the first time in nearly three years in a close decision that underlined the bank's hawkish stance.
Stocks fell after muted trading activity and weaker rand hedges owing to a firmer local currency.
At 1530 GMT the rand was 1.26 percent firmer at 13.7300 slightly softer than its session-high of 13.7275 hit shortly after the decision by the Reserve Bank (SARB).
The decision to raise rates by 25 basis points to 6.75 percent was the first time the bank had raised benchmark rates since January 2016 and after cutting them last in March this year.
Analysts said the hike was likely a once-off and rates would remain on hold in the near term.
Higher lending rates typically boost the investment return of a currency, known as the carry-yield. The rand, along with emerging market currencies, has struggled in 2018 in the face of rising lending rates in United states and slack global growth.
"If the U.S. yield closes too much on ours and we become comparatively less attractive as an investment destination, it would put further pressure on the rand," said chief economist at Citadel Maarten Ackerman.
Bonds also responded positively to the decision, with the yield on the benchmark 2026 government paper falling 11 basis points to 8.95 points, its firmest since Aug. 30.
"The bank would want to keep real interest elevated to make it costlier to speculate against South African assets, and that bolsters financial assets and the economy against volatility," said Halen Bothma of ETM Analytics.
In equities, the All Share index was 0.26 percent softer at 51,187 points while the Top 40 index was 0.30 percent lower at 44,996 points.
"There has been subdued activity today with the U.S. holiday so the market close that side putting a dampener on trading volumes," said Ferdi Heyneke, portfolio manager at Afrifocus Securities.
On the up side, South African clothing retailer Mr Price Group Ltd was up 6.14 percent to 251.50 rand after reporting higher half-year earnings.
Tiger Brands rose 4.84 percent to 284 rand after saying it will spin off its 42 percent stake in fishing company Oceana Group worth $330 million, to focus on growing its food and drinks business.