Reserve Bank raises repo rate sooner rather than later

A stronger recovery in the US has injected some certainty in the markets that the Federal Reserve will begin its rate-hiking cycle in December this year. (Oupa Nkosi, M&G)

A stronger recovery in the US has injected some certainty in the markets that the Federal Reserve will begin its rate-hiking cycle in December this year. (Oupa Nkosi, M&G)

The South African Reserve Bank raised the benchmark interest rate by 25 basis points in the face of recovery in the United States, and exchange rate volatility, on top of a deepening drought and Eskom’s application for an electricity tariff hike.

The decision to raise the repo rate to 6.25% on Thursday was not an easy one. Economists were earlier divided on which choice the Reserve Bank’s Monetary Policy Committee (MPC) would make when it met this week.

A stronger recovery in the US has injected some certainty in the markets that the Federal Reserve will begin its rate-hiking cycle in December this year.

“The US Fed is likely to raise its policy rate in December, and further volatility in financial markets can be expected in the lead-up to this,” said Reserve Bank governor Letsetja Kganyago in announcing the decision to hike the repo rate.

“In the absence of demand pressures, the MPC had to decide whether to act now or later,” he said. “On the one hand, given the relative stability in the underlying of core inflation, delaying the adjustment could give the MPC room to reassess these unfolding developments at the next meeting, and avoid possible additional headwinds to the weak growth outlook.

“On the other hand, delaying the adjustment further could lead to second-round effects and require an even stronger monetary policy response in the future, with more severe consequences for short-term growth,” Kganyago said.

Headline inflation measures at 4.7% for October and core inflation, which strips out volatile components such as food and energy prices, has remained stable at 5.2%. The Reserve Bank’s monetary policy generally makes use of interest rate adjustments to keep inflation within a target band of 3% and 6%.

Kganyago also noted an improved performance in manufacturing, and said a further contraction in gross domestic product (GDP) is not expected for the third quarter when the figures come out next week.

The growth outlook remains weak. The Reserve Bank’s forecast for GDP growth has been revised down marginally for 2015 and 2016 to 1.4% and 1.5%, but remains unchanged at 2.1% for 2017, Kganyago said.

The rand exchange rate, in response to developments abroad, is still of great concern. It has been particularly volatile, even compared with its peers, because domestic factors also affected the currency, the governor said.

“Since the previous meeting of the MPC, the rand has appreciated by about one percent against the euro but has depreciated by around 3% against the dollar, and by 1.5% on a trade-weighted basis,” he said. “As before, the extent to which Fed tightening has been priced into the exchange rate remains uncertain. Nevertheless, a high degree of volatility and overshooting of the exchange rate may be expected in the lead-up to, and in the immediate aftermath of the start of, the US interest rate cycle.”

The Reserve Bank believes Eskom’s application to the National Energy Regulator to claw back excess expenditure of R22.8-billion is likely to lead to a further tariff increase, although the quantum and timing is uncertain. “This is in addition to the 12.2% tariff increase already built into the inflation forecast for next year,” Kganyago said.

Food price inflation was, surprisingly, on the downside in recent months, despite there having been sharp increases in maize and cereals prices earlier in the year. But the increased intensity of the drought, which has led to downward revisions of the domestic maize crop estimate, as well as budding pressures on inflation, suggest that acceleration in food price inflation is likely, he said.

Although the low global oil price has been beneficial for the domestic inflation outlook, and could prompt another small drop in the petrol price next month, it is not enough to outweigh the other upward risks to inflation, the Reserve Bank believed.

Lisa Steyn

Lisa Steyn

Lisa Steyn is a business reporter at the Mail & Guardian. She holds a master's degree in journalism and media studies from Wits University. Her areas of interest range from energy and mining to financial services and telecommunication. When she is not poring over annual reports, Lisa can usually be found pottering about the kitchen. Read more from Lisa Steyn

Comments

blog comments powered by Disqus

Client Media Releases

NWU PhD student to present at Young Scientist Conference
MTN opens nominations for Women in ICT awards
How will IOT affect your world?
Mandela Day lives on with Brainstorm's Leaders of Tomorrow