The South African Reserve Bank (SARB) voted on Friday to keep interest rates fixed at 6.75%, with the SARB’s policy committee narrowly voting in favour of leaving rates unchanged following a casting vote from governor, Lesetja Kganyago.
The decision saw the South African rand (ZAR) rise swiftly to GBP/ZAR 17.91 to the pound. It also moved towards USD/ZAR 13.28, up 0.39% on the American dollar following the announcement.
Three members of the SARB’s policy committee pushed for unchanged interest rates while a further trio sought to cut rates by 0.25%, resulting in Mr Kganyago having to step in and make the final decision based on encouraging growth during Q2 2017 after two successive quarters of decline in the South African economy.
The rand is almost at a one-year high against the pound, having plummeted to depths of 15.51 to the pound in March; a great time for forex traders to get on board due to its immediate rebound after bottoming out. Meanwhile, the rand has rallied impressively in September to 13.24 against the dollar since hitting lows of 12.77 at the beginning of the month.
Some reports anticipate the GBP/ZAR pair to remain in a technical uptrend, with the rand expected to hit 18.62 in the coming months.
Despite the positives of growth during Q2 2017, these were outweighed by South Africa’s more negative growth prospects in the longer term, due in no small part to declining national investment deriving from a dip in overall business confidence.
The threat of uncertainties surrounding the economy – despite the recent rally – resulted in the policy committee agreeing it would be appropriate to keep rates at their existing level, with a view to reviewing the data and the short-term risks at their next quarterly meeting.
It was certainly a decision which shocked many financial traders, who anticipated the SARB to drop rates.
However, the SARB pointed to its slightly revised economic forecasts as another reason to keep interest rates as they are. The committee now believes the South African economy will expand at a rate of 0.60% in 2017; up from earlier forecasts of 0.5%. The SARB anticipates accelerated economic growth in 2018, up to 1.2%, with inflation recorded at an average of 5.7% and 5.8% in 2017 and 2018 respectively.
In fact, one of the primary factors in the upward trend in the national economy was the involvement of investors in South Africa’s emerging market bonds. Policies of the G10’s central banks forced investors to search further afield for higher-yielding investments such as the rand, particularly when compared with other emerging market economies.
A statement from the SARB confirmed that acquisitions of South African government bonds made by investors outside of the country have risen to R(63) billion so far this year.
“The domestic yield curve relative to other peer emerging market economies remains attractive to non-residents despite a decline in the curve across all maturities,” the statement said.
Those trading government bonds will certainly need to keep their fingers on the pulse in the coming weeks and months as the threat of a downgrade on the rand’s credit rating would surely spark a mass sell-off from non-residents.