STEVEN SWINDELLS, Johannesburg | Tuesday
THE unexpected announcement by South Africa’s Reserve Bank that it plans to increase domestic interest rates by 25 basis points at its daily repurchase tender has failed to stop the currency’s woes, sending government bond yields higher and trimming gains on the stock market.
South Africa’s beleaguered rand traded at a record low of 7.56 against the dollar on the back of the announcement and fresh euro weakness.
The Reserve Bank last revised its repo rate in January to 11.75% and has avoided rate increases since in order not to jeopardise prospects for economic growth.
But at a special meeting of the bank’s Monetary Policy Committee, the bank said it had revised its monetary policy stance to fight off the threat of inflationary pressures fuelled by higher world oil prices, a weaker rand and signs of a widening trade deficit and selling in government bonds.
”It was concluded that a modest increase in interest rates at this stage may avoid later steep increases in rates,” Reserve Bank Governor Tito Mboweni said in a statement.
Analysts said the volatile rand had been burdened by concern over the impact surging global fuel prices would have on South Africa’s sluggish economy, along with a renewal of contagion jitters sparked by Zimbabwe’s land ownership crisis.
The rand’s fortunes remained tied to the euro, which fell below 85 cents to three-week lows against the dollar after Europe’s top central banker Wim Duisenberg downplayed the chances for more central bank intervention weeks after a surprise move in September.
The rand has depreciated around 20% this year against the US currency because of dollar strength and political and economic instability in neighbouring Zimbabwe.
”This news was not expected by the market at all and the bond market is likely to be volatile for a few days as it digests the new scenario,” said Leon Myburgh of Barclays Bank. – Reuters