S.African rand plummets as 50 bps rate hike fails to impress traders

By Promit Mukherjee

JOHANNESBURG (Reuters) -The South African rand went into a surprise free fall on Thursday as the central bank raised its benchmark lending rate by 50 basis points, as it strives to stem sticky food inflation and prop up a bruised currency.

At 1500 GMT, the rand was trading down 2.14% at 19.6725 against the dollar, after sliding 2.5%, its biggest single-day fall in more than a year.

The South African Reserve Bank (SARB) raised the repo rate to 8.25%, its 10th consecutive hike in a row, taking it to a 14-year high as the central bank scrambles to tame inflation.

This comes at a time when several major global central banks have hinted at a pause in the rate hike cycle as inflation has shown signs of easing.

But with domestic factors such as chronic power cuts, transportation bottlenecks and a local currency hovering at an all-time low due to a recent diplomatic fallout, the job of the central bank has become tough.

“The medication might be bitter, but if the patient does not take the medication they will end up in surgery and in intensive care,” Governor Lesetja Kganyago said.

South African inflation has turned out to be resilient and has stayed well above the central bank’s target range of 3% to 6% for around a year, with data on Wednesday showing April consumer prices rose 6.8% year on year.

The market was not convinced that the hike was enough.

“Around 40% of the economists and pundits expected a 75 basis point hike. Obviously they are quite disappointed with the 50,” said Murendeni Nengovhela, an economist with fund manager Alex Forbes.

James Wilson, emerging market strategist at ING, a Dutch financial services powerhouse, said the central bank’s communication has done little to push back against rand’s weakness.

The bank has “even highlighted expectations for further currency depreciation, reaffirming their general stance to allow a pure free float in the currency”, he said.

The main indexes on the Johannesburg Stock Exchange posted their first rise this week driven by mining and industrial stocks.

The benchmark all-share index closed 0.8% higher at 76,221 points and the blue-chip index of top 40 companies gained about 0.9% to 71,002 points.

South Africa’s benchmark 2030 government bond dropped with the yield up 6.5 basis points at 11.110%.

(Additional reporting by Tannur Anders, Rachel Savage in Johannesburg and Amruta Khandekar in BangaloreEditing by Alexander Winning and Vinay Dwivedi)