South Africa's central bank on Thursday raised the benchmark repo rate by 25 basis points to 6.75 percent despite weak economic growth. File Photo: IOL

JOHANNESBURG – FNB has confirmed that it would increase its prime lending rate from 10 percent to 10.25 percent with effect from Friday after the South African Reserve Bank's (Sarb) decision to lift its repo rate, adding that a rate hike had become a necessity.

South Africa's central bank on Thursday raised the benchmark repo rate by 25 basis points to 6.75 percent despite weak economic growth, saying it assessed the risks to the longer-term inflation outlook to be on the upside. 

FNB chief executive Jacques Celliers, said by lifting interest rates, the Reserve Bank had taken a widely anticipated step to protect consumers from higher inflation. 

"While this may seem punitive to borrowers, a higher interest rate serves the best interests of all consumers especially those with limited income who are most vulnerable to higher prices. Today’s rate hike will also bring some relief to pensioners who are dependent on income from their interest-bearing investments," Celliers said.

"With the holidays upon us, I urge consumers to think about their budgets in January and their spending plans for 2019." 

Stimulus funding

Central banks in Europe and the US are now ending or slowly withdrawing stimulus funding intended to off-set the global financial crisis of 2008. The era of high, but artificial, liquidity is drawing to a close and consumers should see this as a long-term trend when making large financial decisions.

FNB chief economist Mamello Matikinca said the Reserve Bank's decision to hike the repo rate by 25 basis points to 6.75 percent was in line with their expectations. 

"Despite recent rand gains and a retreat in the oil price, continued monetary policy tightening in developed markets pose upside risk to South Africa’s longer-term inflation profile, and the Reserve Bank acted pre-emptively to contain any breach of the upper target band," Natikinca said. 

"While mindful of the weak domestic growth environment, the central bank’s mandate is price stability and given this delicate trade-off, we expect the MPC to hike very gradually in 2019 in line with US Fed tightening."

Some analysts had expected the Reserve Bank to keep interest rates unchanged to ease pressure on the struggling economy. The Sarb reduced its own growth forecast to 0.6 percent on Thursday, down from 0.7 percent in September.

South Africa is currently in a technical recession after a consecutive contraction in GDP in the second quarter. The National Treasury has cut the overall economic growth forecast for 2018 to 0.7 percent from the 1.5 percent predicted in February.

African News Agency (ANA)