Rate hikes to hit SA's economic growth

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Gill Marcus Two Independent Newspapers Central bank govenor Gill Marcus. Photo: Mxolisi Madela.

Johannesburg - South African economic growth will be hit this year as the Reserve Bank hikes interest rates to quell inflation stoked by a weaker rand, a Reuters poll found on Thursday.

Just weeks after the Reserve Bank's surprise decision to raise the repo rate by 50 basis points to 5.5 percent, economists have chopped their growth forecasts.

The economy is now seen expanding by only 2.5 percent this year compared to the previous month's forecast of 2.8 percent when the repo rate was at a four decade low.

“We are very concerned about downside risks to economic growth, which was aggravated by the recent interest rate hike and prospects of further monetary policy tightening,” said Elna Moolman, economist at Macquarie.

The poll also predicts rates will rise by a further 150 basis points over two years.

Last month's rate rise was the first in nearly six years signalling the beginning of a tightening cycle after the central bank eased rates by cumulative 650 basis points to 5.0 percent since 2008.

The latest Reuters poll sees consumer inflation averaging 5.9 percent this year compared with a rate of 5.7 percent reported last month.

That is lower than the South African Reserve Bank's forecast for 6.3 percent, above its 6 percent comfort level, which it expects to be breached in the current quarter.

The Bank expects inflation to peak at 6.6 percent in the last three months of the year.

“They (the SARB) are clearly assuming that the pass through from the currency weakness into inflation will accelerate this year whereas it has been pretty tame up till now,” said Hugo Pienaar, economist at the Bureau for Economic Research.

He noted that they had to revise assumptions for the rand, inflation and hence the impact on real disposable income which goes into the consumer spending forecast.

In a separate poll, the rand and the Turkish lira were tipped to be the most vulnerable currencies in the event of another emerging market sell-off despite aggressive interest rates hikes from their central banks.

The rand lost almost a quarter of its value last year.

Still, the Reserve Bank forecast growth for Africa's biggest economy at 2.8 percent from 3.0 percent projected in November, above 1.9 percent estimated for 2013. - Reuters

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