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Investors have raised bets on more interest rate cuts by South Africa’s central bank after a historic contraction in the economy during the second quarter, when the coronavirus lockdown measures reduced activity.
The South African Reserve Bank (Sarb) cut rates by 300 basis points over the course of 2020 to support the economy, but had hinted at the end of the cycle of cuts after July, when two of the five lawmakers voted against it. your 25 bp trim.
But after the lousy economic data on Tuesday, investors have stepped up their bets on a further rate cut at the Sarb meeting on September 17. The South African economy contracted an annualized 51.0% in the April-June quarter from the first quarter, or 16.4% in unadjusted terms, which is the number of countries that present their data.
One- and three-month forward rate deals on the Johannesburg Stock Exchange were offered below 3.5%, the Sarb’s benchmark rate, on Wednesday, a sign that investors are seeing lower rates.
Forward contracts that started in late September were priced at a 50% probability of a 25bp cut, and three-month contracts had a nearly 70% probability.
“Headline and core inflation have stagnated at the bottom of the target range, so the odds of a cut are increasing,” said Vladimir Demishev of Sova Capital.
South Africa’s credit rating was downgraded to junk earlier this year, boosting demand from premium investors to buy its bonds and making support for the economy more expensive.
Bond yields soared above 13% in the first quarter as non-resident investors sold a record R74.4 billion ($ 4.43 billion) of bonds. Yield-hungry buyers have since returned, although foreign holdings were at an eight-year low of 29.9% in August.
“Second quarter GDP should be enough for policymakers to justify another rate cut, especially given that SA has one of the highest real returns in the emerging market,” said Kieran Siney of ETM Analytics, citing a real return to 10 years of more than 5%.
