Johannesburg - The South African Reserve Bank has hiked the repo rate by another 0.25 percent, citing increased inflationary concerns.
This takes the prime lending rate to 9.75 percent and will place a further burden on those who have debt, but will be welcomed by those with investments.
In a statement issued by the bank, Reserve Bank Governor Lesetja Kganyago cited increased pressure to the inflationary outlook and SA’s deteriorating economic situation as key contenders for the hike by the Monetary Policy Committee (MPC).
The bank’s latest forecast puts inflation at 4.6 percent in 2015, and 6 percent and 5.8 per cent in the next two years.
“The anticipated breach of the upper end of the target range in the first quarter of 2016 is now expected to average 6.4 percent, compared with 6.7 percent previously.
“The trajectory for the rest of the year is also slightly lower than previously forecast, with the temporary breach in the fourth quarter of 6.1 percent. The forecast for 2017 follows a slow downward trend, with inflation still expected to measure 5.7 percent in the final quarter.”
“The general approach of the MPC is to attempt to see through exogenous shocks and react to second-round effects. However, shocks of a persistent nature, for example extended periods of currency depreciation or drought, or multi-year increases in electricity prices make it more difficult to disentangle these first and second round effects,” said Kganyago.
Kganyago said the MPC had to decide whether to act now or later. Waiting would have given it the opportunity to rethink the headwinds at the next meeting, but that could have also led to second-round effects and require an even stronger monetary policy response in the future, with more severe consequences for short-term growth.
“Complicating the decision was the deteriorating economic growth outlook. Although the change to the growth forecast was marginal, the risks to the outlook, which were more or less balanced at the previous meeting, are now assessed to be on the downside.”
Against this difficult backdrop, the MPC decided to increase the repurchase rate by 25 basis points to 6,25 per cent per annum effective from 20 November 2015. Four members preferred an increase, while two members favoured an unchanged stance.
The Reserve Bank last hiked rates in July when it put the repo rate up by 25 basis points on the back of inflationary risks. That move took the repo rate to 6 percent, and the prime lending rate to 9.5 percent.
Kganyago and his monetary policy Committee faced a tough decision this afternoon as inflation on Wednesday quicked as expected to 4.7 percent, which is within the bank’s 3-6 percent target range. However, SA’s economy has been battling and National Treasury expects it to grow at just 15 percent this year before hitting 2.8 percent by 2018, which is not sufficient to create jobs.
The bank’s forecast is more subdued than this, with Kganyago forecasting GDP of 1.4 percent for this year and 1.6 percent for next year, rising to 2,1 per cent in 2017.
Kganyago also pointed to continued weakness of the rand. The rand has been weakening against the dollar and has been hovering over 14 as it seems increasingly likely that the US Fed will hike rates at some point.
This would lure investors to the US and cause money to leave SA.
South Africa’s economy is also battling several other issues such as high debt levels and low savings rates.
On November 24, the country will find out whether the country has slide into a recession when Stats SA releases third-quarter growth figures.
In the second quarter, the economy contracted by 1.3 percent.
Of the 26 economists surveyed by Bloomberg, 16 predict the rate would stay unchanged, while the rest expect a quarter-point increase.
IOL