Bond yields hit record low on hope of rate cut
SOUTH African bond yields fell to record lows yesterday, fuelled by expectations that the Reserve Bank will lower interest rates at its next monetary policy committee meeting in April.
Analysts said that the strong rand and favourable inflation outlook would give the Bank room to cut rates without fuelling demand and increasing fears of a rise in inflation.
Bond yields fall when the price rises and are highly dependent on the interest rate environment.
Analysts said that if rates remained on hold at the next meeting, there could be a turnaround in bond yields.
Inflation figures, which will be released by Statistics SA next week, are expected to show that inflation slowed last month, on the back of a firm rand and moderate oil prices.
A Bloomberg survey of economists expects CPIX (consumer inflation less mortgage costs), which is the Banks targeted measure of inflation, to have slowed to 3,9%, from 4,3% in December. Inflation has remained within the Banks 3%-6% target for 16 consecutive months.
Softer than expected growth figures on Tuesday also added to the case for a rate cut, analysts said. The economy grew 4% in the fourth quarter, down from 5,7% in the third quarter.
The momentum in manufacturing, agriculture and mining, meanwhile, slowed under pressure from the strong rand.
There is a new conviction that the rand will remain persistently strong, as the currency continues to surprise on the upside, Standard Bank group economist Goolam Ballim said yesterday. He said the mid-term inflation profile remained benign.
The imbalance between supply and demand in the economy may precipitate a further easing in the policy rate in the second quarter, Ballim said.
Despite painting a benign inflation outlook, the Bank left rates unchanged at 7,5% at its meeting earlier this month, citing strong local demand and uncertainty about the outlook for the rand as some of the reasons for keeping rates steady. Markets had priced in a two-thirds chance that rates would drop 50 basis points.
Bank governor Tito Mboweni said at the time that CPIX would peak at just above the midpoint of the inflation target this year, and ease after that.
Analysts said there was confidence in the markets that rates would be cut in the first half of this year. The market has priced in a 50 basis points cut in April, and the rands overnight strength has heightened expectations, said Econometrix treasury management analyst Michael Keenan.
The rand was trading below R6 to the dollar for the second day yesterday, and was quoted at R5,974 to the dollar in late afternoon trade and ended the day at R6,01 to the dollar.
Oil prices remain vulnerable to geopolitical tensions, and fears that oil cartel Opec could cut production if prices dropped too low.
We expect inflation numbers will impress in the coming months, and there is a 80% to 90% probability of a rate cut in April, Keenan said. With Bloomberg
Article by: Ayanda Shezi - www.businessday.co.za