Rand strengthens on rate cut

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Rand strengthens on rate cut

Published Date: 2019-07-19 | Source: Stephen Gunnion | Author: Petri Redelinghuys

Rand strengthens on rate cut

I guess it is not a surprise to anyone that the South African Reserve Bank cut benchmark interest rates by 0.25% to 6.50%. Of the 22 economists surveyed by Bloomberg, 4 expected no cut, 17 expected a 0.25% cut and only 1 saw a cut of 0.50%. Therefore the cut of 0.25% was in-line with market expectations. The reaction from the Rand was a little opposite to what would normally happen, probably because the market was largely expecting the outcome that we saw. Usually, on the back of a rate cut, the Rand would weaken, instead this time around we saw it strengthen. This is good news for South Africa as it means that money is flowing into our market.

The question now is whether or not it changes anything in terms of our thinking around portfolio composition over the next few months. I would say no, it does not. There was no massive reaction from any sector that I could see, so overall I would say that we don't need to consider any reallocations on the back of lower interest rates this time around.

Generally lower interest rates are bad for banks as it puts pressure on their margins, in the sense that the spread between interest they charge on loans and interest they pay on cash investments (which they use to fund loans) is being compressed. In this particular case though, it would seem that the overall relief that lower interest rates will bring to the economy and consumers outweighs the short-term negative impact that it could have on banks. That said, the expectation would then be for retailers to rally on the back of the news as lower interest rates translates into more disposable income for the average consumer. Again though, we didn't really see a strong reaction from that sector either.

I guess that although we did get an interest rate cut, it was completely anticipated by the market and there seem to be no re-ratings or big moves on the back of it. So business as usual.




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