Like­li­hood of rate cut af­fects bonds

The Star Early Edition - - PRICES - Reuters

SOUTH African bonds priced in a higher like­li­hood of a 50 ba­sis point rate cut by the cen­tral bank sooner than an­tic­i­pated af­ter the econ­omy un­ex­pect­edly slipped into re­ces­sion and raised the risk of fur­ther credit down­grades.

For­ward rate mar­kets yesters­day were pric­ing in a nearly 30 per­cent chance of a 50 ba­sis point in­ter­est rate cut at the next pol­icy meet­ing in July, up from a 9 per­cent prob­a­bil­ity seen be­fore the May pol­icy meet­ing.

The South African Re­serve Bank has treaded a cau­tious pol­icy path in the last 18 months, keep­ing bench­mark rates on hold at 7 per­cent while sig­nalling it had reached the end of a tight­en­ing cy­cle that be­gan in early 2014.

The bank may, how­ever, be pushed to act to save the econ­omy by cut­ting lend­ing rates sooner than planned to make money cheaper in a bid to boost con­sumer spend­ing, an­a­lysts said.

Data on Tuesday showed that the econ­omy con­tracted by 0.7 per­cent in the first quar­ter of 2017 af­ter shrink­ing 0.3 per­cent in the fourth quar­ter of last year.

At its pol­icy meet­ing in May, Re­serve Bank Gover­nor Le­setja Kganyago played down the prospects of cheaper bor­row­ing costs, cit­ing risks to in­fla­tion posed by cur­rency volatil­ity in light of do­mes­tic po­lit­i­cal un­cer­tainty and credit rat­ings down­grades.

Econ­o­mists also said risks to in­fla­tion and the cur­rency, posed by large cap­i­tal and trade deficits, had faded.

“For a whole host of rea­sons the prospect of a rate cut has def­i­nitely in­creased. The bank could very well pri­ori­tise growth, putting it higher than has been case where in­fla­tion has been front and cen­tre,” said di­rec­tor ETM An­a­lyt­ics Ge­orge Gly­nos.

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