Johannesburg - For the first time in more than five years, the Reserve Bank hiked its repo rate yesterday. The surprise decision to raise the key interest rate by 50 basis points to 5.5 percent pushes the prime rate to 9 percent – while a range of other rates will rise in tandem.
The backdrop to the hike, which comes months before the general election, was a sharp slide in the value of the rand in recent days. The slide has compounded losses the currency has suffered since the start of last year, now amounting to more than 20 percent against the dollar.
The rand swiftly added to its losses in the wake of the interest rate hike, hitting an intra-day low of R11.3803 against the dollar. The domestic currency last traded at these levels in October 2008 as the global financial crisis raged shortly after the collapse of Lehman Brothers in the US.
Going into the Reserve Bank’s policy meeting, economists bet on the bank keeping the repo rate unchanged. That was the optimistic scenario.
The 50 basis point hike represents the worst-case scenario, and it goes to show the extent of the worry that has permeated the bank’s thinking, especially at a time when the US Federal Reserve is also readying itself to rein in the availability of easy stimulus money, which has increasingly found its way to emerging markets such as South Africa.
Consumers who have debt equal to more than 75 percent of their disposable income will be hit by the move, which comes ahead of an expected announcement that a litre of petrol at the pump will rise by more than 30c next month.
Governor Gill Marcus warned that the global financial crisis, which started in 2008, was not over. She said the world was entering a new phase “that is creating new challenges for emerging market economies”.
The decision by the Fed to reduce its monthly monetary boosts is making investors less willing to invest in emerging markets and is creating chaos in their currency markets.
“How to respond to a combination of sharply depreciating currencies, capital outflows, slowing growth, rising inflation, significant current account and/or fiscal deficits and deteriorating confidence is posing policy challenges and very difficult trade-offs for many emerging markets,” Marcus told a news briefing in Pretoria.
The bank’s move was unexpected given the low-growth outlook – 25 economists surveyed by Bloomberg predicted no change. Marcus estimated growth last year was only 1.9 percent and revised down the forecast for this year to 2.8 percent from 3 percent at the November meeting of the monetary policy committee (MPC).
However, Marcus flagged inflation risks despite data released last week showing that inflationary pressures were benign last month, with the consumer price index rising at a slower-than-expected pace of 5.4 percent.
The MPC decision came after the rand hit a fresh five-year low of R11.25 to the dollar on Monday. The currency, like those of most other emerging markets, has been hit by the tapering of the easy money programme, which the Fed has implemented for five years.
And more currency weakness could be on the way as the Fed continues to taper or as speculators bet the Reserve Bank will not have adequate ammunition to protect the currency in the long run.
The impact has already been seen in non-resident flows in and out of South Africa. According to Citi, in the month to date, foreigners have sold a net R18.8 billion worth of domestic bonds and shares after inflows of just under R1bn last year, well down on the net inflows worth R83.8bn in 2012.
Kevin Lings, the chief economist at Stanlib, noted that South Africa was the last of the countries described as the fragile five – Indonesia, India, Brazil, Turkey and South Africa – to increase interest rates.
At an unscheduled policy meeting on Tuesday, Turkey’s central bank hiked the repo rate from 4.5 percent to 10 percent, sending the overnight lending rate from 7.75 percent to 12 percent – despite opposition to the move from Turkey’s government.
Barclays research noted that the Turkish lira responded by rising 4.1 percent against the dollar “to trade at its strongest in 20 days”, though it later gave up some of the gains.
Standard Bank said both Turkey and South Africa had large current account and budget deficits, which made them reliant on foreign funding.
South Africa’s previous repo rate increase – from 11 percent to 12.5 percent – came in June 2008, pushing prime and mortgage rates to 15.5 percent. Rate cuts started in December of that year, with prime and mortgage rates falling to 8.5 percent by July 2012 as the repo rate was cut to a 40-year low of 5 percent.
The monthly repayment on a R1 million mortgage bond fell R4 861 – from R13 539 to R8 678 – in the period. Yesterday’s move will add R319 a month. - Business Report