South Africa’s central bank raised its key repo interest rate by 50 basis points to 9,5% on Thursday after a breach of its inflation target, and warned inflationary pressures were widening.
But it stressed that targeted inflation moving outside the bank’s range should not cause panic, adding it expected the move to rein in prices.
South African Reserve Bank Governor Tito Mboweni said the outlook for inflation had deteriorated, predicting CPIX — consumer prices minus mortgage costs — would again pierce the top end of the 3% to 6% target band in the fourth quarter after a short reprieve.
”The Monetary Policy Committee has decided that in view of the further deterioration in the inflation outlook, the monetary policy stance needs to be adjusted to ensure that CPIX inflation returns to within the target range over time,” he told a news conference.
South African commercial banks quickly followed suit, raising the prime lending rate to 13%.
The inflation gauge surged through the upper end of the bank’s band in April for the first time in nearly four years, hitting 6,3% year-on-year.
The rand currency firmed after the announcement but the reaction was muted with most traders and economists expecting a 50 basis point rise.
Thursday’s rate rise ends a pause in the upward cycle this year and follows the higher-than-expected inflation, and continued high credit, data released last week, which hardened the case for a resumption in increases.
‘No need to panic’
Producer inflation also surprised on the upside and credit growth accelerated slightly to 25,08% year-on-year, also in April, to stay near an all-time record.
The surge was largely due to higher food and fuel costs caused by drought in some parts of the country and high international oil prices — both factors outside the control of the central bank.
But Mboweni said more broad-based inflationary pressures were becoming evident in the economy, saying the central bank’s forecasts showed CPIX peaking again at 6,3% year-on-year in the first quarter of 2008.
”Petrol-price increases accounted for most of the increases but more broad-based pressures are also becoming evident,” he said.
Analysts said the hawkish nature of Mboweni’s comments could suggest another rate increase in August, although later remarks by Zolile Guma, the central bank’s deputy governor, pointed to a more measured approach.
”Clearly the debate at the MPC was not about hiking rates or not, rather about hiking it by 50 or 100 basis points … In all likelihood I will not be surprised if in the next MPC they hike rates [again],” Mandla Maleka, economist at electricity utility Eskom, said.
Guma said in a televised interview after the announcement that the breach of the target should not be a reason to panic.
Asked if he thought Thursday’s adjustment would achieve the goal of returning CPIX into the target, he said: ”We think so, otherwise we would’ve acted differently.”
The central bank raised its repo rate by two percentage points between June and December last year before keeping it steady at 9% at its February and April policy meetings.
Meanwhile, South African commercial banks have increased their lending rates after the announcement of the 50 basis points rise.
This takes banks’ lending rates from 12,5% to 13%.
Nedbank and Old Mutual Bank’s new overdraft rate is effective on June 11. The new mortgage rate on existing home loans comes into effect on June 11 and the rate on new home loans comes into effect on June 8, Nedbank said in a statement.
Standard Bank’s rate increase — for new and existing clients — takes effect on June 8.
Absa’s increases are effective from June 8. — Reuters, I-Net Bridge