Johannesburg — THE rand's rally to a 2½ -month peak against the dollar has raised the odds of an interest rate cut at the Reserve Bank's policy meeting next week, although most analysts believe rates will be kept steady.

Comments yesterday from one of the Bank's deputy governors, Renosi Mokate, who spoke about the effect of capital inflows on the rand, added to the speculation.

The rand has appreciated more than 3% since the last monetary policy committee meeting (MPC). It was trading at R7,29 to the dollar late yesterday after touching R7,27/ earlier in the week, its firmest since January 5.

Extremely low interest rates in developed countries were prompting investors to put their money into emerging economies to take advantage of higher yields, she told a leadership conference.

"We've seen significant capital flows coming to countries such as SA and causing the currencies to strengthen," she said.

"This is obviously having an unintended consequence for emerging markets and these are challenges going forward because there's a potential for another crisis to occur if appropriate leadership is not exercised."

Mokate told Business Day later she meant it would be difficult to come up with a uniform policy to "exit" from co-ordinated measures to deal with the global crisis. But some analysts interpreted her remarks to mean the Bank may consider a rate cut next week even though its global counterparts were either holding rates steady or starting to raise them.

"It seems she was saying something very deliberate -- we have to go it alone," said Razia Khan, Standard Chartered's regional research head for Africa.

"Rand strength suggests there is room for the Bank to do something unexpected. It's not our core call, but there is a stronger likelihood of a rate cut than the market is pricing in."

Forward rate agreements in local money markets have put a 30% chance on the odds of the Bank cutting its repo rate by half a percentage point to 6,5% next week. The Bank lowered the repo rate by five percentage points to 7% between December 2008 and last August, in a bid to help jolt SA out of recession.

At the last meeting of the Bank's MPC in January, governor Gill Marcus said a decision to keep the repo rate steady was not unanimous, with some members arguing strongly for a cut.

The main issue at the time was lack of clarity over pending electricity price hikes, seen as the main threat to the inflation outlook. Since then, they have been set at 25% over each of the next three years -- well below the 35% Eskom had requested.

Currency appreciation tends to erode the competitiveness of local exports but also keeps inflation in check by reducing import costs.

So far the rand's sustained strength does not seem to have hit exports badly, as they have helped boost factory output, which is leading SA out of recession. But there is concern that the unit's appreciation of nearly 30% against the dollar last year, and its volatility, will harm the recovery. The Bank's policy meeting next week will be the first since its inflation targeting mandate was "clarified" in last month's budget. Finance Minister Pravin Gordhan published a letter he wrote to Marcus which repeated that the framework was flexible, allowing the Bank to take growth and jobs into account when making interest rate decisions.

Trade unions have campaigned vigorously for the official 3%-6% inflation target to be widened or scrapped. The release of inflation figures for last month has been brought forward by 2½ hours to coincide with the start of the MPC meeting on Wednesday. Inflation is likely to have subsided back inside its target range, after breaching it for two months.

"Prospects for another rate cut shouldn't be dismissed," said Brait economist Colen Garrow.