Rand steadies ahead of lending rate decision

Rand steadies ahead of lending rate decision

"As a result the central bank might use the favourable environment to cut interest rates and support the economic recovery as it had done in the summer of 2017".

The market anticipated a cut - and would have been disappointed had it not come.

"While the increase in the value-added tax rate to 15 percent places temporary upside pressure on inflation, this is mitigated by the stronger exchange rate which has contributed to the changing inflation risk profile", Governor Lesetja Kganyago told a news conference, announcing a reduction in the repo to 6.5 percent from 6.75 percent.

Policymakers upgraded their forecast for GDP growth in 2018 to 1.7%, from 1.4% previously, although projections for inflation and growth in 2019 were tweaked lower. These latter changes appeared to have been the basis for the rate cut Wednesday.

"Since the previous meeting of the Monetary Policy Committee (MPC), the risks to the inflation outlook have subsided somewhat", it said in a statement on Wednesday afternoon (28 March).

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Consumer inflation, which the bank uses as a guide for deciding rates, has remained within the bank's target of 3% to 6% for the past year and is expected to average 4.9% this year.

After securing its investment grade rating from Moody's, which lifted its outlook to stable from negative, the threat of an exit from Citigroup's World Government Bond Index has also receded, giving investors who track the index confidence to hold the debt.

Rand assets have been basking in investor optimism since it became clear late a year ago that President Cyril Ramaphosa would replace scandal-plagued Jacob Zuma as head of state.

Future policy decisions would be highly data-dependent and sensitive to the assessment of the balance of risks to the inflation outlook, Kganyago said. "USD/ZAR support 11.50", says ING's Turner. Lower interest rates can be expected to weaken the Rand because the currency derives much of its support from rates that are, relative to those in the developed world, very high.