Monetary Policy Committee announcements and stock market reaction in South Africa

Abstract

Monetary policy, and more specifically, inflation targeting through interest rate announcements, plays a major part in determining the movement in share prices. The purpose of the research was to determine whether there is a significant share price reaction to monetary policy announcements. The study also evaluated the performance of small firms relative to large firms, and further analysed whether there was a significant sector index reaction to monetary policy announcements on share indices on the JSE Securities Exchange Ltd. The first sample was for interest rate announcements made by the Reserve Bank, and included all announcements for the 2004 – 2007 period. During this time the Reserve Bank made a total of 10 announcements; all during normal working hours, hence the reason they are all included in the analysis. The second sample comprised data collected from the JSE for the 2004 – 2007 period for end-of-day share prices during the different event window periods (11 days). The sub problems were first to determine whether there was a significant share price reaction to monetary policy announcements, and secondly, to analyse the performance of small firms relative to large firms and their reaction to monetary policy announcements. Thirdly, the research aimed to determine whether there was a differential and significant reaction of the various sector indices to monetary policy announcements. The findings of the study are that, monetary policy announcements, and more specifically interest rate announcements, made by the Reserve Bank have not resulted in any significant changes on individual share prices, when comparing large and small shares and indices prices using the event study methodology and risk adjusted market model. ii The key message is that the JSE Securities Exchange is an efficient market, which incorporates any changes in monetary policy announcements made by the Reserve Bank quickly and efficiently with very little time lag. The conclusion in this study is that the equity market in South Africa is efficient.