The monetary policy committee's move to cut rates by 0,5 percentage points had a dynamite effect on financial markets, with bonds and equities soaring, while the local currency slumped.

The Bank's governor, Tito Mboweni, anticipated that the committee's decision would send shock waves across financial markets, and he tried to prepare the public accordingly ahead of reading out the committee's statement.

He said the statement may "surprise" in terms of the tone it took. It certainly did as it was a complete about-turn in sentiment since June's committee statement.

At the June meeting and in his subsequent speeches Mboweni had struck a cautious tone, saying that the targeted inflation measure CPIX (consumer inflation excluding mortgage costs) may well breach the 6% upper limit of the inflation target later this year.

He also signalled at the time that the rate-cutting cycle had ended, saying "the party was over".

Yesterday, however, the "party" simply picked up from where it left off, with the Bank lowering its repo rate to 7,5%, prompting commercial banks to cut the prime overdraft rate to a 23-year low of 11%.

The Bank's unexpected move yesterday was spurred by the positive effect of the strong rand on import prices, which has helped keep a lid on inflationary pressure.

"One of the main factors responsible for the recent and expected future low inflation is the decline in import prices, brought about by the further rise in the external value of the rand and low global inflation," said the committee's statement.

The Bank now says there is no risk of CPIX breaching the target over the next two years, although it may reach close to the 6% upper limit in the second half of next year.

It seems that in the same way that no one could predict the rand's phenomenal strength in the past two years, many have underestimated the positive effect of the currency on inflation.

Consumer inflation figures over the past few months have been more positive than the market had expected, and even better than the Bank's own forecasts.

But while the rand's strength has been important in reining in inflation in the economy, it has been a drag on the export sector, squeezing profit margins while many exporters had to retrench workers.

Facing more strident criticism from exporters and labour unions about the negative effect of the rand, the committee appears to have considered these comments by dropping rates.

Although Mboweni denied yesterday that he was responding to external pressure to weaken the rand, the market took the news as just that, sending the rand tumbling to a two-month low against the dollar at R6,47 more than 26c lower than its previous close of R6,21.

With the market dominated by inflationary fears from record high oil prices and strong domestic spending, the rate cut went against almost all economists' forecasts.

Mboweni, however, was unfazed about the effect of lower rates on domestic demand, saying it would be an inflationary problem only if demand levels were unreasonable.

"As long as the demand response is not forcing the inflation rate above the target, then we are cool about it," he said.

Business Day