Johannesburg - South African Reserve Bank governor Lesetja Kganyago on Thursday afternoon announced the Monetary Policy Committee had to decided to again hike rates.
This takes the prime lending rate to 10.5 percent, up from 10.25 percent.
The Reserve Bank has raised rates by 0.75 percent since November.
Citing higher inflation this year, Kganyago noted inflation would come back into the target band by the final quarter of next year, and the five-year prediction was unchanged. However, the continued breech of the target band was a concern, as were upside risks on the back of high food prices and the exchange rate.
The governor also noted the international economic outlook remained subdued. “Growth will remain below potential in the coming months”, he said. Emerging market economies continue to experience weak outlooks, and SA’s outlook had worsened, Kganyago added.
He also noted the US Fed was expected to continue to normalise, but at a reduced pace, in contrast to some emerging markets.
The MPC’s decision comes as SA grapples with political ructions low economic growth – projected to come in at under a percent this year – and steeply increasing food prices, which many expect to filter through to inflation.
Hike expected
The bank is tasked with keeping inflation between the 3 percent to 6 percent range and it is currently tracking at 6.2 percent based on the latest available figure from January.
As a result, many economists had expected a hike. At the end of last week, traders were pricing in a 55 percent chance the Reserve Bank will increase the repurchase rate by 25 basis points to 7 percent.
Read also: ‘Rate hike will hurt the poor’
Razia Khan, chief economist for Africa at Standard Chartered, forecast a hike of 0.5 percent to come through, an increase on her previous prediction.
Khan on Wednesday noted analyst expectations had been split between no change and a 25 basis point hike for some time.
As perceptions of political risk in South Africa alter, and the South African rand comes under further pressure, Khan believes the South African Reserve Bank will need to act earlier, and perhaps more aggressively, to underscore its commitment to a 3-6 percent inflation target.
The rand is currently hovering between 15 and 16 to the dollar, having been hit by an apparent spate between Finance Minister Pravin Gordhan and the Hawks over a so-called rogue unit at the South African Revenue Service.
However, Kganyago noted the rand had come off its January
The rand lost ground after the Hawks said it would force Gordhan to cooperate with their investigation of the tax agency, which he had led before 2009. On March 16, the rand reversed losses after deputy finance Mcebisi Jonas minister said he was offered the finance minister’s post by Jacob Zuma’s friends, the Gupta family. The Guptas have denied such a move and threatened to take action, while opposition parties have laid criminal charges over the incident.
Risky business
Khan notes “there are risks to our view. South African growth is weak. In the past quarter, both the Reserve Bank and the Treasury have revised down their official growth forecasts for 2016 to only 0.9 percent. Weak performance in mining and manufacturing mean that the risks, even to this growth forecast, are to the downside.
High interest rates may boost the rand, but will knock those earning less than R5 000 a month, says DebtBusters CEO Ian Wason.
Consumer price index (CPI) figures reveal that, so far this year, South Africans have had to absorb on average a 6.2 percent year-on-year increase in electricity, food and transport. The latest Pietermaritzburg Agency for Social Development (Pacsa) report reveals that since January, the price of a 25kg bag of staple food for poor families - maize meal - has increased by 12 percent.
Adds Dawie Maree, head of information and marketing at FNB Business, Agriculture: “Farmers that are still recovering from the impact of the drought would be hardest hit by a hike in interest rates, given that the electricity tariff increase and tyre levy are coming into effect in April and October respectively.
“Furthermore, if the price of meat continues to increase, there will be a push back from consumers who will avoid eating out, directly affecting restaurants and retailers.”
Yudhvir Seetharam, head of Analytics at FNB Business notes, apart from the direct impact on SMEs’ cash flow and ability to service debt, interest rate increases hamper consumer confidence, their ability to spend and save; which ultimately has a direct impact on the bottom line of small businesses.
Meanwhile, Jacques Du Toit, Absa Senior Economist, notes rates are back at levels last seen in early 2010. “The latest interest rate hike came against the background of continued upward pressure on inflation as a result of trends in and the outlook for major inflation drivers, such as the exchange rate, food prices, electricity tariffs, and oil and fuel prices.
“Further hikes in lending rates are forecast for the rest of 2016, which will cause debt repayments to increase, contributing to additional financial strain on consumers. “
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