The rand gained a few cents after the Reserve Bank’s monetary policy committee (MPC) cut interest rates by 25 basis points (bps) on Thursday afternoon, a decision widely expected by markets.

Reserve Bank governor Lesetja Kganyago said there had been “no discussion” of a 50bps cut in the repo rate for July, although the decision to cut by 25bps had been unanimous.

Markets had been partially pricing in a 50bps cut, and the Bank’s tone had been somewhat hawkish, said Cristian Maggio, head of emerging-markets strategy at TD Securities.

At 4pm, the rand was 0.76% firmer at R13.9035/$, after trading at R13.99 as Kganyago began speaking. It gained 0.68% to R15.6245/€ and 0.26% to R17.3751/£. The euro was flat at $1.125.

A stronger rand and a rally in local bonds recently made room for the Reserve Bank to cut interest rates by 25bps in July, but further cuts may be made more difficult by the prospect of looming volatility in emerging markets, according to analysts.

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The rand, along with its emerging-market peers, has rallied in recent months due to a weaker dollar, as markets price in a series of interest-rate cuts by the US Federal Reserve. Local bond yields have also fallen, with the benchmark 10-year, due in 2026, near a 15-month low on Thursday.

“The market seems to be buying risk rather than selling it,” said Maggio, adding, however, this is largely due to the expectation of looser Fed monetary policy, but SA’s idiosyncratic risks continue.

“The MPC assesses the risks to the growth forecast to be balanced in the near term but remains concerned about longer-term risks,” Kganyago said on Thursday. “Investment prospects will continue to be limited in the absence of structural reforms. The escalation of trade tensions could have further negative impacts.” 

The best-case scenario is for the Bank to remain cautiously dovish, said Mercato Financial Services analyst Nico du Plessis in a note released ahead of the announcement.

While in the short-term, one or two 25bps cuts could be justified, should the global economy continue to slow and the dollar recover, emerging markets could see heightened volatility, Du Plessis said. “Investors are urged to consider the ramifications of a series of interest-rate cuts should they materialise.” He added that any rand strength in the coming months may not be sustained over the longer term.

Markets have now probably largely priced in Fed cuts, and while emerging-market bonds have rallied in recent months, a correction looked imminent, Nedbank Corporate and Investment Banking senior strategist Neels Heyneke said in a note. The rand, however, should continue to outperform other emerging-market currencies as much of SA’s government debt was rand-denominated, he said.

Although global central banks will respond to slowing global growth with looser monetary policy, they may be underestimating the extent to which global liquidity will contract. There could be pressure on the global carry trade, Heyneke said. The carry-trade refers to borrowing money in a low interest-rate environment in order to buy higher-yielding assets — such as emerging-market bonds.