Johannesburg - Inflation fears were behind the SA Reserve Bank's (SARB) decision to raise the repo rate to 5.5 percent, Investec said on Wednesday.
“In contrast to market expectations, the SARB opted to raise the benchmark repo rate by 50 basis points,” economist Kamilla Kaplan said in a statement.
This marked the first change in interest rates in nearly a year-and-a-half. The repo rate is the rate at which the SARB lends money to commercial banks.
Kaplan said the SARB raised its inflation forecasts, with the extent of the increase being relatively material.
“Specifically, the SARB now expects CPI (the consumer price index) inflation to average 6.3 percent in 2014 versus a forecast of 5.7 percent at the November 2013 monetary policy committee meeting,” she said.
“The SARB continues to consider the growth outlook to be precarious owing to both internal and offshore dynamics and lowered its GDP forecast for 2014 from three percent to 2.8 percent.”
In 2015, GDP (gross domestic product) was expected to reach 3.3
percent instead of 3.4 percent.
“The SARB noted that 'the primary responsibility of the bank is to keep inflation under control and ensure that inflation expectations remain well anchored',” said Kaplan.
“This suggests that the possibility of further interest rate hikes later this year cannot be completely precluded.”
Grindrod head of asset management Paul Stewart said the increase occurred in part because several other emerging economy central banks hiked short-term interests rates. They did this to protect falling exchange rates against the US dollar, Euro and British pound, which forced the SARB's hand to an extent.
“They had to be seen to be doing something instead of standing by and watching the train wreck,” he said in a statement.
“In many of these emerging markets, a significant proportion of their bond debt is issued in US dollar and Euro, so currency depreciation implies much higher interest costs to the fiscus.”
The hiking of rates by the emerging market economies was an attempt to stem capital outflow.
“This is not the case in South Africa where the bulk of the debt is rand denominated,” said Stewart.
“So perhaps the SARB did have some wriggle room, which they decided not to use.”
The 50 basis points increase, from a previous repo rate of five percent, was not material in the bigger scheme of things.
“Whether now is the right time will be a point of significant debate, but I suspect the SARB is worried about the inflationary effect of the weakening rand,” he said.
The bank signalled to the market that higher rates were on the way. The impact on the economy would not be significant, but consumers with high levels of debt would suffer.
“If we see another 50 to 100 basis point (increase) in the next three months, that will begin to mount pressure on consumers,” he said.
Stewart said Wednesday's increase arguably marked the start of a gradual rate tightening cycle that could last three to four years.