Pretoria - South Africa's Reserve Bank raised interest rates for the first time in nearly six years on Wednesday, keeping in step with other emerging market economies that have tightened monetary policy to try to stem sharp falls in their currencies.
The Reserve Bank lifted the repo rate at which it lends to commercial banks by 50 basis points to 5.5 percent, saying pressures on the exchange rate were expected to intensify and the primary responsibility of the bank was to keep inflation under control.
“Exchange rate pressures are expected to intensify as markets adjust to the new pattern of global capital flows,” South African Reserve Bank (SARB) governor Gill Marcus told a news conference.
ANALYSTS COMMENTS
TRADITION ANALYTICS
“This is the first time since June 2008 that the SARB tightened policy and highlights the depth of concern over the emerging market rout witnessed in response to the US Federal Reserve's decision to taper quantitative easing, and the subsequent inflation risks posed by the severe depreciation in the rand.
“Growth dynamics remain weak, however, and the decision to hike rates has no doubt been a begrudging response to global factors beyond the control of the SARB as monetary authorities would have been under political pressure to keep policy accommodative.
“The decision is possibly the best outcome as it is bound to provide room for a much needed recovery in the rand.
More Fed tapering is likely imminent and this should keep EMs, who benefitted greatly from a prolonged period of loose policy which sent a wall of money flooding into its higher yielding assets, in a vulnerable position.
“More rate hikes cannot be ruled out, yet the cycle is expected to be sharp and short lived as economic growth fundamentals remain particularly weak.”
MARKET REACTION
The rand plunged to 11.38 against the dollar, its weakest in more than five years.
The yield on the 2026 bond climbed to 8.805 percent, from 8.675 percent prior to the announcement.
The yield on the shorter-dated 2015 bond soared to 7.01 percent from 6.82 percent. - Reuters