SA rand takes hit after interest rate cut
JOHANNESBURG - The South African Reserve Bank (SARB) surprised the market this morning by cutting interest rates by another 100 basis points after recently indicating that it would not look to cut interest rates any further during 2020.
Bianca Botes, Executive Director at Peregrine Treasury Solutions, said, "Even though SARB has not indicated it formally, we can assume that this move comes as a reaction to the extension to the lockdown and the anticipated effect that it will have on the South African economy. It also indicates to us that the SARB is not too concerned about the inflationary pressure that this could cause, given the low level of demand that we are currently witnessing."
The rand reacted negatively, weakening 1 percent back to the R18.20/$ level, after trading at around R18.00 following positive Chinese trade data this morning.
SARB governor Lesetja Kganyago announced in March earlier this year, at the start of South Africa's response to the pandemic that the Reserve Bank would cut interest rates by 100 basis points.
This took the repo rate to 5.25 percent which took effect from 20 March 2020, and saw the prime lending rate drop to 8.75 percent.
SARB said this month the economy could shrink by as much as 4 percent in 2020 due to the COVID-19 pandemic, which has forced a national lockdown and triggered two credit ratings downgrades.
It also launched a bond-buying programme in late March, seeking to plug a liquidity drought in credit markets that threatened to destabilise commercial banks’ operations.
The SARB has long resisted public and political pressure to intervene more directly in providing stimulus, but recent policy moves bring it into in line with major central banks that have run large-scale asset purchase programmes.