South Africa’s central bank to review policy settings

The South African Reserve Bank (SARB) will today announce a revised interest rate decision after slashing its key repo rate

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Photo: Adamina

The South African Reserve Bank (SARB) will today announce a revised interest rate decision after slashing its key repo rate to a record-low of 4.25% in April.

As emerging markets experience a pandemic-induced capital flight to safer assets, the South African rand weakened last week against the US dollar haven and strengthened against a pound sterling diminished by Brexit. Bond yields have staged a strong recovery despite a Moody’s downgrade to ‘junk’ status in March, which broadcasts a higher likelihood of government default.

As the South African economy enters its eighth week of lockdown, an additional rate cut could bolster risk-on sentiment and domestic currency performance. While recent SARB measures—such as rate cuts, term repos and quantitative easing—have provided a strong foundation for bond market recovery, the cost of sustained government financing will depend on an upcoming June budget adjustment necessitated by significant reductions in government revenue.

Weak global demand indicates that an additional cut, which could lower the benchmark record to 3.25%, is very much on the cards. New rand trades will likely carry significant event risk associated with the upcoming rate decision. Expect the price of gold—currently riding a six-month upward trajectory—to reflect the gradual recovery of a domestic economy especially reliant on bullion exports.

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