Filomena Scalise

Johannesburg - South African government bond yields hit record lows on Thursday while the rand weakened against the dollar after the central bank unexpectedly cut its key lending rate and sounded a dovish tone on inflation while trimming its economic growth forecasts.

The Reserve Bank cut the repo rate by 50 basis points to 5.0 percent, surprising the market after 19 months of no change to rates. Only two out of 23 economists polled by Reuters had anticipated the cut.

Commercial banks followed suit and cut their lending rates to consumers by the same margin to 8.5 percent.

Yields on the front end of the curve extended earlier declines to record lows after the rate cut and the central bank's lower inflation forecasts, widening the yield spread between the three- and 14-year bonds by 8 basis points.

The rand was the worst performer in a basket of emerging market currencies trading against the dollar after the unexpected cut in interest rates underscored a bleak outlook for global and economic growth.

The unit was down 0.2 percent to 8.1780 to the dollar at 16h20 GMT, recovering from its initial reaction to 8.20 after the rate cut, and off a 8.16 close in New York on Wednesday.

“This was based not solely on domestic factors but the condition of the globe. It is in line with what we have seen from other central banks in terms of combating lower global growth and assisting with liquidity provision where they can,” said Garth Klintworth from Absa Capital.

The yield on the 2015 bond plunged 39 basis points to 5.36 percent on the day while the 2021 yield hit a record 6.545 percent, down 32 basis points.

“I think the market was expecting a cut this year, but not at this meeting. It is attractive for short term bonds that are shorter than the R203.”

Some analysts think this may be the beginning of another rate cutting cycle after a cumulative 650 basis points of rate cuts in the two years to November 2010.

“It would suggest that the Reserve Bank feels they're a little bit behind the curve when they look at interest rate movements in other countries and hence the decision, which means you could well have another cut before the end of the year if their concerns materialise,” said Kevin Lings from Stanlib.

The short-term money market started to price in another cut this year, with 3x6-month forward rate agreements moving to 4.81 percent, suggesting a 28 percent chance of another 50 basis point cut by the end of the year. - Reuters