MPC surprises with increase in repo rate

160316 SARB Gorvernor Lesetja Kganyago decided to raise the repo rate by 25 basis point.Photo Simphiwe Mbokazi

160316 SARB Gorvernor Lesetja Kganyago decided to raise the repo rate by 25 basis point.Photo Simphiwe Mbokazi

Published Mar 18, 2016

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Johannesburg - The monetary policy committee (MPC) of the Reserve Bank raised its benchmark interest rate for the second time yesterday in a split decision amid a political crisis that is hurting the rand.

The MPC increased the benchmark repo rate by 25 basis points to 7 percent after a 50 basis points hike in January, as it said it saw inflation averaging 6.6 percent this year.

Read: Rand reverses losses after rate hike

The rand rose 2.4 percent to R15.2888 against the dollar after the rate announcement, the biggest gain on a closing basis since December 14.

Economists

Three members favoured the increase, while the other three preferred no change.

The Reserve Bank targets inflation at between 3 percent and 6 percent and said the breach of the upper target range remained a serious concern.

A majority of economists and analysts expected the Reserve Bank to leave rates unchanged to support economic growth.

Inflation accelerated to a 17-month high of 6.2 percent in January as the rand plunged 17 percent against the dollar in the past six months and the worst drought in more than a century boost costs.

Reserve Bank governor Lesetja Kganyago said the latest inflation forecast of the Reserve Bank had improved somewhat but argued that a protracted breach remained a serious concern.

The MPC revised its forecast on inflation to average 6.6 percent (previously 6.8 percent) and 6.4 percent (previously 7 percent) in 2016 and 2017 respectively.

Kganyago said that inflation was expected to peak at 7.3 percent in the fourth quarter of this year, and to return to the target range only in the fourth quarter of next year.

“Given the upside risks to the inflation forecast and the protracted period of the expected breach, the MPC decided that further tightening was required to complement the previous moves,” Kganyago told a news conference.

The governor said that food prices had accelerated faster than previously expected due to the weaker exchange rate and the intensification of the drought, resulting in an upward revision to the food price forecast.

Market fallout

Kganyago’s job has been complicated by an increase in political risk in South Africa, contributing to the rand’s weakness.

In December, President Jacob Zuma caused market fallout when he unexpectedly fired his finance minister, Nhlanhla Nene.

Current Finance Minister Pravin Gordhan is also facing questions from the elite police unit, the Hawks, related to a rogue surveillance unit in the SA Revenue Service, heightening political tension.

The tension was further exacerbated on Wednesday by a confirmation by Deputy Finance Minister Mcebisi Jonas that he was approached by the Gupta family in December who offered him Nene’s job.

Moody’s Investor Services is reviewing South Africa’s credit rating for a possible downgrade, which will put its assessment one level above junk on par with that of Standard & Poor’s and Fitch Ratings.

“South Africa’s rapidly metastasising political scandal is eroding investor confidence, raising the risk of another run on the currency,” Capital Economics analysts said.

“Slightly tighter monetary policy would do little to insulate the rand from another crash if President Zuma provides another political surprise.”

Kganyago said that the bank’s independence was not under threat.

He said the MPC remained concerned about the weak growth outlook amid negative business and consumer confidence, but it assessed the risk to the growth outlook to be on the downside.

He added that the domestic growth outlook had deteriorated further.

He said annual economic growth of 1.3 percent in 2015 was in line with the Reserve Bank’s expectations, but the forecasts for this year and next year had been revised down from 0.9 percent and 1.6 percent to 0.8 percent and 1.4 percent respectively.

Growth forecast of 1.8 percent is forecast for 2018.

Colen Garrow, an economist at Lefika Securities, said a number of market observers had questioned the probity of increasing interest rates at a time when the economy was steering more convincingly towards a recession.

“What would the MPC do, for instance, if the economy were to go into a technical recession, but trend in the CPI (consumer price inflation) remained in the upper end of its target? Would the bank remain true to its inflation fighting credentials, and maintain the tight grip on monetary policy?”

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