The impact of monetary policy announcement on financial markets in South Africa

Monetary policy announcements are among the major decisions that affect the economy as a whole. The purpose of this study was to analyze the impact of monetary policy announcements on equity markets in South Africa during 2014-2015 financial years. That financial period is a unique year for analyzing the impact of monetary announcements on stock returns because the Reserve Bank Governor was changed in the last quarter of 2014. Moreover, interest rates were changed in four monetary policy announcements over the course of two years. This provides a good opportunity to investigate how monetary policy announcements can affect financial markets. The study used an event study methodology whereby a 15-day event window is used as well as a 45-day estimation window. Around the event window, abnormal returns were calculated using the market model and capital asset pricing model (CAPM) was used to calculate expected returns. The results are mixed; (both significant and insignificant) impact of monetary policy announcements on JSE stock returns. Of the 12 interest rates announcements, only four seemed to be significant. It was observed that of the four significant results, three of them were because of a hike in interest rates. The results show an asymmetric response by the market to interest rate changes. The results also suggest that the market anticipated the relative volatility arising from the change of the minister of the reserve bank governor. Following the appointment of the new Central Bank‟s governor in the last quarter of 2014, the first interest rate announcement seemed to have been anticipated by the public thereby rendering it insignificant. Inorder to improve the strength of the results in future, it is important that that there should be the absence of signalling effect in the market. It is recommended that the markets are efficient and the announcements should not be highly anticipated by the public