SA inflation surprise a tailwind for bonds and rand

Investors in South African bonds are cheering a slowdown in inflation, which has given the central bank more room to lower interest rates.

Forward-rate agreements moved to price in a 32% chance of a 25 basis point reduction in the repo rate next month, from zero on Monday. Yields on rand-denominated government bonds due December 2026 dropped 10 basis points, the most in a month to 8.29%.

Read: Inflation rate falls to six-month low in July

Sarb likely to keep main rate at 6.50%

A rate cut would lower the cost of refinancing government debt and liabilities of state-owned enterprises, said Cristian Maggio, the head of emerging-market strategy at TD Securities in London. That’s good news at a time when the sovereign is increasing borrowing to bail out Eskom.

The rand strengthened 1% to 15.20 per dollar, leading emerging-market currency gains. The consumer-price index rose 4% in the year through July, down from 4.5% the previous month and less than the 4.3% median estimate of economists in a Bloomberg survey.

“The low CPI reading today is positive for the rand as it increases real rates, gives room to the Reserve Bank to cut and thus helps at least marginally on the fiscal side,” Bank of America Merril Lynch strategists David Hauner and Rukayat Yusuf wrote in a client note.

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