Interest rate cut next week?

The rand’s rally to a 2½ -month peak against the dollar has raised the odds of an interest rate cut at the Reserve Bank’s policy meeting next week, although most analysts believe rates will be kept steady.

Comments yesterday from one of the Bank’s deputy governors, Renosi Mokate, who spoke about the effect of capital inflows on the rand, added to the speculation.

The rand has appreciated more than 3% since the last monetary policy committee meeting (MPC). It was trading at R7,29 to the dollar late yesterday after touching R7,27/ earlier in the week, its firmest since January 5.

Extremely low interest rates in developed countries were prompting investors to put their money into emerging economies to take advantage of higher yields, she told a leadership conference.


“We’ve seen significant capital flows coming to countries such as SA and causing the currencies to strengthen,” she said.

Forward rate agreements in local money markets have put a 30% chance on the odds of the Bank cutting its repo rate by half a percentage point to 6,5% next week. The Bank lowered the repo rate by five percentage points to 7% between December 2008 and last August, in a bid to help jolt SA out of recession.

Currency appreciation tends to erode the competitiveness of local exports but also keeps inflation in check by reducing import costs.

So far the rand’s sustained strength does not seem to have hit exports badly.

Trade unions have campaigned vigorously for the official 3%-6% inflation target to be widened or scrapped. The release of inflation figures for last month has been brought forward by 2½ hours to coincide with the start of the MPC meeting on Wednesday. Inflation is likely to have subsided back inside its target range, after breaching it for two months.

Source: Business Day
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