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Cape Town - The rand was trading more than 1% weaker on Wednesday following the decision by the Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) to cut interest rates by 25 basis points.
"While a possible interest rate cut was on the cards, it has still taken some in the markets by surprise," said Jameel Ahmad, FXTM's global head of currency strategy and market research.
SARB governor Lesetja Kganyago announced on Wednesday the first repo rate cut since July last year, reducing the repo rate to 6.5% from 6.75%.
Commercial banks announced shortly after the MPC announcement that they will reduce the prime lending rate to 10% with effect from Thursday.
The repo rate is the benchmark interest rate at which the SARB lends money to commercial banks and the prime rate the rate at which commercial banks lend money to borrowers.
Pointing out the rand's appreciation since the last MPC meeting, Kganyago said "at current levels the bank models see the rand as somewhat over-valued".
It is these comments that might weigh on the rand over the medium-term, potentially putting the brakes on its 5.5% year-to-date rally, said Ahmad.
By 17:59 the rand clawed back some of its losses against the greenback, trading 0.58% weaker at R11.73/$ after hitting R11.80 shortly after the announcement and from its open of R11.64.
Ahmad said the decision to lower interest rates may be a positive move for the SA economy and should encourage consumer borrowing, providing a boost to economic momentum at a time where gross domestic product (GDP) data is starting to show that the local economy may be turning the corner.
"The fact that the economy is now expected to encounter lower inflation risks may have influenced the decision from some members of the MPC to ease interest rates," he said.
Ahmad pointed out that the ongoing weakness in the dollar has also encouraged strength in the rand in recent months.
"Overall it was a very close decision to cut interest rates, with only four out of seven members of the MPC voting to cut interest rates this month," he said.
Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions, expects continuous downward pressure on the rand following the rate cut, coupled with the robust data released from the US.
"We can also expect to see a drop-off in carry trade as SA moves to lower rates, while both the US and Europe enter a rate-hiking cycle."
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