(Corrects to say rand fell first time in five days in first paragraph.)
The rand weakened for the first time in five days and bonds rose after Reserve Bank Governor Gill Marcus said South Africa’s economic outlook has deteriorated, fueling expectations of a rate cut.
South Africa’s currency depreciated 0.7 percent to 8.1315 per dollar as of 1:50 p.m. in Johannesburg, the worst performance out of 16 major currencies monitored by Bloomberg. Yields on the nation’s 6.75 percent bonds due 2021 retreated three basis points to 7.13 percent, the lowest on a closing basis on record.
Inflation, which probably peaked in the first quarter, is on a declining trend and will likely remain within the bank’s target range through 2014 as Europe’s debt crisis erodes growth, Marcus said. It reached a two-year high of 6.3 percent in January before slipping to 5.7 percent in May.
“Given the kind of numbers that we are seeing at the moment, you cannot discount another rate cut,” Arthur Kamp, an economist at Sanlam Investment Management in Cape Town, said by phone.
The central bank has left its benchmark repurchase rate at 5.5 percent, a three-decade low, since November 2010 to help stimulate growth. Investors are betting on a rate cut within the next year.
One-year interest-rate swaps, an indication of investors’ expectation of average interest rates, have declined six basis points in the past month to 5.37 percent, falling below the repurchase rate for the first time since November. Forward-rate agreements starting in December are trading at 5.26 percent, or 34 basis points below the three-month Johannesburg Interbank Agreed Rate.
Economic growth slowed to an annualized 2.7 percent in the first quarter from the previous three months. Retail sales contracted in the first quarter and manufacturing growth almost stalled in April. The purchasing managers’ index fell below 50 for the first time in six months in June, indicating manufacturing output shrank, Kagiso Tiso Holdings Ltd. said on July 2.
Finance Minister Pravin Gordhan lowered his growth forecast for this year to 2.7 percent, while the central bank in May cut its prediction to 2.9 percent from 3 percent.
Economic conditions in Europe and the fiscal constraints in the U.S. are damping prospects for global growth, Marcus said. “It is a very grim situation.”
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