South Africa's currency weakened on Thursday after the central bank decided to leave its key lending rate unchanged, a move that ran counter to market expectations for another increase. At 1418 GMT the rand was trading at 16.7125 against the U.S. dollar, roughly 1.9% weaker than its prior close and near its lowest level versus the greenback in about two months.
Many investors and economists had anticipated a rate rise from the South African Reserve Bank, citing a jump in inflation to 5.0% year-on-year in June - well above the bank's 3% target. That rise in consumer prices had led market participants to expect tighter policy.
At a press conference, SARB Governor Lesetja Kganyago said the bank judged policy to be restrictive enough. Alongside the decision to hold rates, the central bank revised down its inflation projection for the year to 4.0% from a prior estimate of 4.4%.
The rate decision initially sent local equity indices lower, but losses on the Johannesburg Stock Exchange narrowed after the announcement. The JSE All-Share Index had traded down about 1.8% before the central bank's statement and was last down 0.8%.
The combination of an unexpected hold by the central bank and the current inflation readings contributed to renewed pressure on the rand, as market participants adjusted positions in currency and equity markets. The central bank's view that policy is already restrictive and its lowered inflation forecast were key elements cited during its communication.
Markets reacted within both the foreign exchange and equity arenas, with the immediate price action reflecting the surprise of a non-hike in the face of above-target inflation. The subsequent trimming of losses on the All-Share Index suggests traders and investors were re-evaluating the balance between the central bank's current stance and the inflation environment.
Contextual note: This report summarizes market moves and official commentary tied directly to the rate decision, trading levels, inflation figures, and the Johannesburg Stock Exchange's performance as communicated at the time of the announcement.