South Africa raised interest rates for the first time in a year on Thursday, despite the continued economic woes engulfing Africa’s most advanced nation.
Lesetja Kganyago, governor of the South African Reserve Bank (SARB), said that while the growth outlook remained subdued, the monetary policy committee was concerned that a failure to raise rates would increase inflationary pressures.
The MPC raised the repurchase rate by 25 basis points to 6 per cent — a move many economists had predicted. It was the first rate rise since July last year when the repo rate — which was at 30-year lows — was increased by a similar amount.
Since then, the country’s growth outlook has deteriorated amid a power crisis that is causing almost daily electricity outages, bouts of labour unrest and weak consumer and investor confidence.
Mr Kganyago said the bank had marginally revised downwards its growth forecast for 2015 to 2 per cent, and to 2.1 per cent for 2016.
South Africa is one of the world’s most liquid and traded emerging markets. But the pace of economic growth is far below the level the nation needs to tackle rampant unemployment and poverty.
Monetary authorities have been grappling with the policy dilemma of persistent inflationary pressures, set against a sustained period of anaemic economic activity, for more than two years.
Against this backdrop, the government has been struggling to narrow current-account and budget deficits. The volatile rand is also vulnerable to global factors, particularly any changes to US monetary policy such as the Federal Reserve raising rates. The rand has depreciated by more than 6 per cent against the greenback this year.
“Economic growth remains subdued, constrained by electricity supply disruptions and low business and consumer confidence, and the risks to the outlook remain on the downside,” said Mr Kganyago.
“However, as emphasised previously, we have to be mindful of the risk of second-round effects on inflation, and the committee is concerned that failure to act against these heightened pressures and risks will cause inflation expectations to become entrenched at higher levels.”
The bank traditionally seeks to keep inflation in a band between 3 per cent and 6 per cent.
Mr Kganyago said its inflation forecast had changed marginally since the last MPC meeting, with the committee predicting that headline inflation for 2015 was expected to average 5 per cent, up from 4.9 per cent. But for the first two quarters of 2016, it was expected to rise to 6.9 per cent and 6.1 per cent respectively.
Razia Khan, African economist at Standard Chartered bank, said the SARB had underscored its inflation-targeting credibility by raising rates in an environment of low growth. But she added that there was “growing uncertainty” over what the bank did next.
“Arguably, by raising the repo [rate] today it did even more for growth, as this tightening meaningfully diminishes the threat of sharp rate increases further out,” she said. “The SARB will have earned itself the luxury of adopting a somewhat more neutral stance in the weeks ahead.”