Cape Town - South Africa’s rand sank to a record against the euro and a five-year low versus the dollar as an unexpected rate increase failed to shore up the currency before the Federal Reserve decides on monetary stimulus.

The South African Reserve Bank raised its policy rate for the first time since 2008, citing inflation pressures caused by the rand’s decline.

The move followed Turkey’s decision late yesterday to more than double borrowing costs.

The Fed ends a two-day meeting today with economists projecting a further cut to its bond-purchase program that helped boost demand for emerging-market debt.

“Turkey last night was probably the last straw which caused a bit of mild panic in the Monetary Policy Committee,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg.

“It just shows you that if you’re an emerging market, right now the driving force is the Fed, and you are powerless to fight against that tide.”

The rand weakened as much as 3.1 percent to 11.3803 per dollar, the lowest level since October 2008.

It traded 1.9 percent down at 11.2543 by 4:31 p.m. in Johannesburg, erasing a gain of as much as 1.2 percent before the central bank announcement.

South Africa’s currency tumbled as much 2.7 percent against the euro to 15.5017.

The rand may extend its decline to 11.80 per dollar after breaching a significant resistance level at 11.25, Nalla said.


Yield Climbs


The yield on benchmark government bonds due December 2026 climbed three basis points, or 0.03 percentage point, to 8.77 percent, the highest level on a closing basis since December 2011.

The rate has climbed 52 basis points this year as foreign investors dumped a net 14.9 billion rand ($1.33 billion) of South African debt.

South Africa’s inflation rate will probably breach the 6 percent upper limit of the central bank’s target range in the second quarter and remain above that level for an extended period, Governor Gill Marcus said as the bank lifted its benchmark repurchase rate by 50 basis points to 5.5 percent.

The move wasn’t intended to support the rand, though the currency’s decline would fuel inflation, she said.

Higher rates risk stifling growth as South Africa struggles to recover from the slowest expansion since a 2009 recession.

The growth outlook remains a concern, Marcus said.

“The bottom line is that the impact the Fed tapering is having on emerging markets is way more pronounced than what emerging-market central banks thought it would be,” Jana le Roux, an economist at ETM Analytics, said by phone from Johannesburg.

“The growth issue will get added focus now that the bank hiked rates.”


Implied Volatility


Turkey’s decision was announced at midnight in Istanbul and followed an unexpected increase in India’s interest rates yesterday.

The lira rallied the most since 2008 before erasing the gain to trade 0.6 percent weaker today.

The Fed will probably announced another $10 billion in monthly cuts to asset purchases, according to the median estimate of 77 analysts surveyed by Bloomberg.

The rand’s three-month implied volatility against the dollar jumped 1.2 percentage points today to 17.35 percent, the highest since July and the most out of 24 emerging-market currencies monitored by Bloomberg.

Rising volatility indicates that options trades see wider price swings in the currency in coming months. - Bloomberg News