Bloomberg News

S. Africa Yields Fall to Record on U.S. Retail Sales; Rand Gains

July 16, 2012

South African bond yields fell to record lows after U.S. retail sales declined, adding to evidence of a global slowdown that may prompt the South African Reserve Bank to lower interest rates. The rand gained.

Yields on the nation’s 6.75 percent bonds due 2021 dropped seven basis points, or 0.07 percentage point, to 6.895 percent as of 3:50 p.m. in Johannesburg, the lowest on a closing basis since at least 2007, according to data compiled by Bloomberg. The rand strengthened 0.2 percent to 8.2464 per dollar.

Retail sales in the U.S. unexpectedly declined for a third straight month in June, a sign limited employment gains are taking a toll on the biggest part of the economy. Investors are betting that slowing inflation and the deteriorating growth outlook will prompt the South African Reserve Bank to cut its benchmark repo rate in the next six months, forward-rate agreements show.

“Lower inflation gives the Reserve Bank room to manoeuvre; now the question is whether growth anxieties are or will become severe enough to prompt a cut,” Bruce Donald, a Johannesburg- based strategist at Standard Bank Group Ltd., wrote in e-mailed comments. “Arguments for a cut sooner rather than later have built up steam” following monetary easing in Brazil, China and India, he wrote.

South Africa’s inflation rate probably dropped to 5.6 in June, from 5.7 percent the previous month, according to the median estimate of 16 economists polled by Bloomberg. The central bank’s mandate is to keep the consumer price index within a 3 percent to 6 percent target band.

Interest Rate

The Monetary Policy Committee is expected to leave its main interest rate unchanged at 5.5 percent when it concludes a three-day meeting on July 19, according to 14 of the 16 economists surveyed by Bloomberg.

Forward-rate agreements, used to speculate on interest rates, are paying 5.21 percent, or 37 percentage points less than the Johannesburg Interbank Agreed Rate, indicating traders are pricing in more than a 70 percent probability of a rate cut by January.

“We expect the MPC to keep the repo rate unchanged at Thursday’s policy announcement,” Theuns de Wet and Mamello Matikinca, analysts at Rand Merchant Bank in Johannesburg, said in e-mailed comments. “However, the statement is likely to be more dovish than the one delivered in May, leaving little doubt the Reserve Bank will become much more willing to react with policy easing should the need arise. We expect that falling inflation and economic growth will push policy makers to act at either the September or November meetings.”

The government forecasts the economy will grow at 2.7 percent this year, the slowest pace since a recession in 2009, as slowing global growth damps demand for the nation’s exports.

To contact the reporter on this story: Stephen Gunnion in Johannesburg at

To contact the editor responsible for this story: Gavin Serkin at

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