Lesetja Kganyago, governor of South Africa's central bank, announces interest rates in Pretoria. The SA Reserve Bank increased its benchmark interest rate for the first time in more than two years. File Photo: IOL

JOHANNESBURG – The rand has cheered the decision of the SA Reserve Bank (Sarb) to hike interest rates for the first time since March 2016, amid a rise in the inflation trajectory, which has deviated from the mid-point of the bank's target range.

The currency's strength was also supported by the cabinet reshuffle. 

The local currency strengthened to R13.78 against the dollar at 5pm yesterday after the Sarb hiked borrowing cost by 25 basis points (bps) to 6.75 percent. 

Sarb governor Lesetja Kganyago cast the deciding vote for a hike after a tie among council members resulted in stalemate.

Bianca Botes, an analyst at Peregrine Treasury Solutions, said: “The 25bp interest rate hike was in line with expectations giving the rand the momentum to trade as strong as R13.77, some 1 percent stronger than its opening in the morning.

 “The market also responded well to the announcement that President Cyril Ramaphosa would be announcing a cabinet reshuffle yesterday afternoon. 

"We have become accustomed to a reshuffle being perceived as negative, so this is quite a refreshing change.”

The hike in borrowing costs came a day after October’s consumer inflation printed at a four-month high, increasing 5.1 percent from September's 4.9 percent.

The central bank, which prefers the inflation rate to anchor at 4.5 percent of its 3 percent to 6 percent target range, said the decision had come after it had assessed the risks to the longer-term inflation outlook to be on the upside.   

The central bank also further cut this year's gross domestic product forecast to 0.6 percent from 0.7 percent in September.

Citadel chief economist Maarten Ackerman said Sarb’s interest rate decisions were not made solely on the basis of economic growth, but also on ensuring that inflation did not run away and breach the upper 6 percent target level.

“The market is signalling its approval of the interest rate move and that we still offer globally attractive real yields, which should support the currency in the longer term,” Ackerman said.

The hawkish rhetoric from Kganyago suggests that policymakers at the Sarb might follow yesterday's hike with another one in the first quarter of next year.

“The implied path of policy rates generated by the Quarterly Projection Model is for four rate hikes of 25 basis points, reaching 7.5 percent by the end of 2020,” Kganyago said.

He also highlighted increased domestic and external risks as key to the repo rate hike, while he also described the hike as a moderate response that would pre-empt inflationary pressures.

North-West University Business School economist Professor Raymond Parsons said the decision by the MPC to raise interest rates sent a negative signal to the economy at this stage.

“It is difficult to reconcile the MPC reducing its growth forecast for 2018 yet again from its previous 0.7 percent to 0.6 percent, with its decision to now raise interest rates,” Parsons said.

“Monetary policy should have continued to give the economic recovery, about which the International Monetary Fund recently said confidence was being lost, the benefit of the doubt.”

The third quarter available activity data has indicated that the economy huffed and puffed its way out of its first recession in nine years.