Reserve Bank raises interest rate to 6.75%

Reserve Bank governor Lesetja Kganyago. (Bloomberg)

Reserve Bank governor Lesetja Kganyago. (Bloomberg)

South Africa’s central bank ramped up its policy tightening by raising the benchmark rate by half a percentage point, worried that inflation pressures from a weaker rand will spread more broadly in the economy.

The repurchase rate was increased to 6.75 percent, governor Lesetja Kganyago said in a televised speech Thursday in the capital, Pretoria. That was in line with the forecasts of 17 of the 26 economists surveyed by Bloomberg. Six had predicted a 25 basis point increase.

The rand’s 15% percent plunge against the dollar since the last policy meeting in November has forced the Reserve Bank to take more aggressive action after limiting its rate increases last year to quarter-point moves. Inflation risks are rising as the worst drought in more than a century boosts food prices, threatening the central bank’s 3% to 6% target range.

“A more front-loaded and assertive monetary-policy stance has become more appropriate,” JF Ruhashyankiko, an economist at Goldman Sachs in London, said in a note to clients before today’s decision. “The inflation outlook has deteriorated markedly.”

The rand’s slump since last year, triggered by falling metal prices and a slowdown in China, worsened in December after President Jacob Zuma shocked the market by firing his finance minister, the US Federal Reserve raised borrowing costs and credit-rating companies signaled South African debt may be downgraded to junk. The currency hit a record low of 17.9169 on January 11.

Inflation accelerated to 5.2% in December. While the halving of oil prices since June has helped to limit gains, food prices are rising as dry weather boosts the cost of staples, including white corn, to record highs.

Policy makers limited rate increases last year to help support an economy that’s set to expand 0.7% in 2016, the slowest pace since the 2009 recession, according to the International Monetary Fund.

The risk of a recession is mounting, with a 45% chance that gross domestic product will contract for two consecutive quarters, according to the median estimate of nine economists surveyed by Bloomberg. – Bloomberg

– With assistance from Simbarashe Gumbo

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