South Africa’s Reserve Bank hikes repo rate by 50 basis points

Johannesburg, South Africa, Capital Markets in Africa —- The South Africa Reserve Bank’s Monetary Policy Committee (MPC) raised the repo rate to 6.75% from 6.25%. This takes the cumulative increases to 1.75 percentage points since the MPC started tightening policy in January 2014. Governor Lesetja Kganyago stated that, although the impact of the weaker exchange rate on inflation had remained muted in recent years, renewed rand weakness and the likelihood of higher food inflation had raised the risk of the pass-through effects becoming more pronounced.

The Bank projects CPI to average 6.8% in 2016 and 7.0% in 2017, higher than the 6.0% and 5,8% projected in November. CPI is forecast to remain above 6% throughout the forecast period, hovering at a peak of 7.8% in the fourth quarter of 2016 and the first quarter of 2017. Forecasts of core CPI have also risen, and it is expected to peak at 6.4% per quarter (previously 5.6%) in the fourth quarter of 2016 and the first quarter of 2017, averaging 6.0% (previously 5.5%) in 2016 and 5.9% (previously 5.4%) in 2017.

The MPC’s decision to raise rates by 50 basis points was in line with analysts’ expectations and reflects the higher risks to the inflation outlook, which have risen significantly since the November meeting. Although the rate increase comes at a very difficult time for the economy, with mining, manufacturing and agriculture under pressure and weak consumer and business confidence, the Reserve Bank has to continue striking a good balance between keeping inflation expectations well anchored and not damaging growth prospects further.