South Africa’s rand dips after surprise rate cut

The rand gave back its early gains on Tuesday, sliding as much as 1% after the central bank delivered a surprise cut to lending rates to address the deepening economic impact of the coronavirus outbreak.

The rand was 0.95% weaker at R18.22 per dollar by 1220 GMT, having dipped as low as R18.37 in the wake of the unexpected 100 basis points cut by the South African Reserve Bank (SARB).

The central bank had already cut rates by 100 bps in March and by 25 bps in January and the latest cut brought rates to a record low of 4.25%, with more reductions likely.

The rand had eked out some gains in early trade as riskier currencies were lifted by trade data from China, which painted a less gloomy picture of the economic fallout from the pandemic.

But the rate cut clipped the currency’s advance, with the policy move narrowing the yield return, or carry, on South African assets, as well as spooking some rand bulls betting the currency would rally further.

“We don’t think the SARB is done here,” said Jeffrey Schultz, economist at BNP Paribas.

“Like every other economist the bank is making forecasts on the go. The situation is very fluid. There’s probably scope for the bank to act a little bit more and take real policy rates down to effectively zero,” Schultz said.

The real or effective interest rate is the return an investor in the currency or local bonds expects to receive, minus inflation. That rate stands at around 5%, but has come down sharply with falling lending rates and benign inflation.

The bank said the cut was a response to the extension of the lockdown and the hit to the economy, which the bank expects to contract 6.1% in 2020.

Government bonds rallied, with the yield on the 10-year instrument due in 2030 falling 24.5 basis points to 10.565%.

In equities, the Johannesburg Stock Exchange’s Top 40 index was up 2.72% to close at 45,030 points, while the All-Share index rose 2.7% to 49,301 points.