Another central bank has caved in and cut interest rates — South Africa lowered its key rate to a record low of 5 percent at Thursday’s meeting. In doing so, the central bank noted growth was slowing further. ”Negative spillover effects (from the global economy) likely to intensify,” it said.
Very few analysts had predicted this outcome, reckoning the central bank (or SARB as it’s known) would hold fire until its next meeting due to concerns over the currency and inflation. But in fact, forward markets had guessed a cut was coming, especially after June inflation was lower than expected. And after all, even the conservative Bank of Korea cut rates last week to buck up domestic growth and compensate for slumping exports. There have also been some policy easing in Taiwan and Philippines in the past week while earlier on Thursday, Turkey’s central bank unleashed more liquidity into the banking system. Kevin Lings, chief economist at Stanlib in Johannesburg says:
(South Africa’s rate cut) would suggest that the Reserve Bank feels they are a little bit behind the curve when they look at interest rate movements in other countries and hence the decision.
SARB’s surprise has given a further boost to South Africa’s ongoing bond rally. 10-year yields for instance had already fallen more than 100 basis points since the start of June to record lows below 7 percent while 30-year yields have slumped 80 bps. Yields collapsed another 25-30 bps on Thursday. Forward markets are now pricing 75 bps in rate cuts by end-2012, a shift of over 30 bps since last week.