Johannesburg - For the first time under Reserve Bank governor Lesetja Kganyago’s tenure the monetary policy committee (MPC) yesterday lifted its key repo rate.
The MPC decided to hike the repo by 25 basis points to 6 percent and this decision was viewed as a borderline call, with the bank saying it remained in a hiking cycle while upside risks to inflation remained in place.
The Reserve Bank had kept borrowing costs unchanged since July last year to help support an economy hit by strikes, power shortages and falling global metal prices.
The rand gave up brief gains to trade weaker against the dollar yesterday despite the interest rate hike.
At 5pm, the rand was bid at R12.4328 to the dollar, 5.93c weaker than at the same time on Wednesday.
“We are still weak versus the dollar. Given the weak state of the economy, the currency is just pricing in those weaker growth conditions that are likely to be exacerbated by the rate hike, even though it was a small hike,” Ricardo da Camara of ETM Analytics said.
Mixed response
Analysts have been almost evenly split about whether South Africa would raise interest rates or hold them.
“There was not a single positive in the central bank’s speech today (yesterday). This is a currency I didn’t want at 5.75 percent and I don’t want it at 6 percent and I wouldn’t want it at 7 percent,” a London-based currency trader said.
Nedbank economists Dennis Dykes and Isaac Matshego said the MPC’s decision to raise local interest rates ahead of an expected US move in September had been signalled, but was nevertheless disappointing in logic and probable effect.
“Risk factors for inflation stressed at the last meeting mostly abated over the past two months, with Eskom’s tariff application being rejected and the oil price falling in both US dollar and rand terms.”
The rand was weak over this period but this was for largely global reasons, with China and Greece both increasing risk aversion.
“Any number of interest rate hikes would do nothing to protect against such moves. By moving now, the Reserve Bank will almost certainly have to move again when the US actually starts tightening policy, but now it will be off a higher base and create more damage to the already weak economy.”
Kganyago, the governor of the Reserve Bank since November 9, said four members had favoured a 25 basis point increase, while two had favoured an unchanged stance.
Bart Stemmet, an analyst at NKC Africa Economics, said although gross domestic product (GDP) growth was stuck in low gear, the Reserve Bank could not wait much longer to raise interest rates, given the upside risk to inflation, which remained its primary objective.
“Also, South Africa’s current economic woes cannot be addressed only by monetary policy, and keeping rates too low for too long could potentially do more harm than good,” he said.
Inflation outlook
The Reserve Bank last raised benchmark lending rates in July 2014, but since then the country has been constrained by power shortages along with other structural obstacles.
“The committee is concerned that failure to act against these heightened pressures and risks will cause inflation expectations to become entrenched at higher levels,” Kganyago said.
“The MPC has, therefore, decided to continue on its path of gradual policy normalisation,” he added.
As before, any future moves would, therefore, be highly data dependent, he said.
Sizwe Nxedlana, First National Bank’s chief economist, said the Reserve Bank had in previous statements signalled its concern about the deterioration in the inflation outlook.
“As a result, the 25 basis point interest rate hike comes as no surprise. We expect more interest rate increases over the next 18 months. However, we expect the magnitude of the current hiking cycle to be a lot less than previous hiking cycles, given the fact it occurs in an environment of very weak economic growth.”
Kganyago said the Reserve Bank expected inflation to breach the upper band of its target range of 6 percent in the first two quarters of 2016.
He said the pace of nominal wage growth remained high and contributed to persistently high inflation.
The government recently backed down from its plan to offer public sector unions a lower pay rise, acceding to demands for an above inflation rise of 7 percent and consumer price index plus 1 percent increases for 2016/17 and 2017/18, adding further pressure to the inflation outlook.
* Additional reporting by Reuters and Bloomberg
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