October 29, 2003

By Reuters and Vernon Wessels

Johannesburg - The rand softened slightly but stayed within its firmer range yesterday, shrugging off the release of inflation data suggesting that further interest rate cuts were on the cards by the end of the year.

By 5pm the rand was trading at R6.9248 to the dollar, 3c weaker than on Monday, little moved by consumer price data showing the annual increase in the targeted CPIX index - consumer price inflation less mortgage costs - was in its target range for the first time in nearly two years.

"The CPI suggests we could see further rate cuts, but the rand's not lost much, and it doesn't look like a massive selloff is about to take place," Gensec technical analyst Jacques Potgieter said.

"The fact we are holding below R7 to the dollar shows the bullish trend remains intact in the near to medium term. We could still test the previous lows."

Potgieter was referring to the rand's surge to a 40-month peak of R6.78 to the dollar early in October. If the unit breaks that level, it could quickly head towards R6.50 to the dollar - a level not seen for four years, charts show.

Statistics SA said CPIX rose by an annual rate of 5.4 percent in September, down from 6.3 percent in August and just below analysts' expectations.  

Independent economist Noelani King-Conradie said the Reserve Bank's monetary policy committee (MPC) might cut rates by 50 basis points to 100 basis points in December, should the rand remain below R7 and the oil price move back below $28.

"[Reserve Bank governor Tito] Mboweni and company will, however, remember what happened in 2001 when too much liquidity was pumped into the economy" and the rand weakened dramatically.

"The central bank will therefore closely look at private sector credit extension and any other indication that consumers are going on a spending spree. Should there be any sign of this, and private sector credit extensions remains well above the key 10 percent level [16.8 percent in August], the MPC could adopt a more cautious approach," King-Conradie added.

The local currency's slide was also fuelled by a fall in the euro, the currency of South Africa's major trading partners.

Bond yields were also little moved yesterday, with the good news largely priced in, through record lows last week. By 5pm the yield on the R150 strengthened 1 basis point to 7.92 percent while the yield on the R153 was also up 3 basis points at 8.82 percent.