Rand drops as inflation moderates more than expected

The rand pared gains on Wednesday morning as consumer inflation decelerated more than expected in October, strengthening the argument that the Reserve Bank may move to cut the interest rate.

An interest-rate cut in SA would give the economy a boost, but it would be likely to weaken the rand, as it would make SA’s bonds relatively less attractive to foreign investors hungry for high-yielding assets.

The consumer price index slowed to 3.7% in October from 4.1%, data from Statistics SA showed on Wednesday. This is below the median forecast of 3.9%, according to Bloomberg.

This is the fourth consecutive inflation print that is below the midpoint of the Bank’s 3%-6% target range.

Mercato Financial Services analyst Nico Du Plessis said subdued inflation is “not likely to be enough justification” for the Bank to cut the repo rate this week, considering SA’s fiscal situation and risks to the rand.

The local currency is down more than 3% so far in 2019, according to Iress data. Analysts have pointed to the threats to SA’s credit ratings as reasons the Bank may be cautious. Global ratings agencies have warned that SA’s credit rating is under threat from a rising fiscal deficit and debt problems at state-owned enterprises.

By 10.16am, the rand had weakened 0.54% to R14.8417/$ after closing at R14.76/$ on Tuesday. It had weakened 0.43% to R16.4212/€ and 0.4% to R19.1555/£. The euro weakened 0.13% to $1.064. 

Gold was up 0.37% to $1,477.81/oz while platinum was flat at $910.99. Brent crude was down 0.69% to $60.3 a barrel.

The R2030 government bond was stronger, with yield falling 1.5 basis points to 9.055%. Bond yields move inversely to bond prices.

The Bank is expected to deliver its monetary policy decision on Thursday with expectations that the Bank will keep the rate unchanged at 6.50%.

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Source: businesslive.co.za