The rand bounced back on Friday morning after yesterday’s surprise interest rate cut hit the South African currency, as analysts predict that a weak dollar and high risk appetite will outweigh local concerns (for now at least).
The South African Reserve Bank on Thursday cut its benchmark interest rate for the first time in five years, in an effort to prevent the economy from sliding further into recession.
The cut – which few economists had predicted – prompted a fall in the rand, but the currency recovered some of its losses on Friday, outperforming its emerging market peers and climbing as much as 0.8 per cent climb against the dollar.
Analysts at Nomura and Commerzbank predicted the SARB could be tempted to make a further cut later this year, after it cut its forecasts for inflation and economic growth.
Traditionally, the prospect of lower rates would be bad news for a currency, but some analysts have suggested the rand will be helped by the bank’s move to boost growth without committing to a full cycle of cuts.
Analysts at HSBC said “the SARB should provide confidence to the bond market and the economy but has no intention of undermining the rand’s high-yielding status. As such we believe the rate cut is likely to be rand-supportive in the near term”.
Nomura’s Peter Attard Montalto agreed that the currency is unlikely to be too badly shaken in the short term, as wider investor enthusiasm for high-yielding assets will support demand for emerging market currencies.
However, he was less convinced that the rate cuts will have a positive impact in the long run, warning that the cut “may look short-sighted” given the risks that the government could face further credit rating downgrades later this year.
The government’s credit rating has already been downgraded to junk status by Fitch and S&P since president Jacob Zuma sacked his respected finance minister earlier this year. Moody’s also cut the government to one notch above speculative grade, and a further downgrade from would force South Africa’s expulsion from the widely-tracked World Government Bond Index, a move that would likely cause a sharp outflow from South African assets.