Reserve Bank of South Africa Raises Rate by 50bps

At its January 29th meeting, Reserve Bank of South Africa decided to raise the repurchase rate by 50 bps to 5.5 percent. It is the first rate hike in nearly six years, aiming to protect the rand and curb expected inflationary pressures.
Reserve Bank of South Africa | Joana Taborda | 1/29/2014 1:35:06 PM
Excerpt from the statement by Gill Marcus, Governor:

The headline inflation forecast of the Bank has deteriorated since the previous meeting of the MPC, mainly as a result of revisions to the assumptions regarding the rand exchange rate. The forecast average inflation rate for 2014 is 0.6 percentage points higher at 6.3 percent, and 0.6 percentage points higher at 6.0 percent in 2015, with inflation expected to average 5.9 percent in the final quarter of that year. Inflation is expected breach the upper end of the target range in the second quarter of 2014, and to reach a peak of 6.6 percent in the final quarter of the year, before declining to 6.0 percent in the second quarter of 2015. 

The MPC carefully considered the economic challenges facing South Africa and the appropriate policy response. On the one hand, inflation forecasts indicate the possibility of being out of the target range for an extended period, largely due to the impact of the depreciating currency. The risks to the inflation forecast are seen to be significantly on the upside. Large adjustments to the exchange rate will inevitably impact on inflation, even in conditions of relatively low pass-through such as we have been experiencing. 

On the other hand, the growth outlook remains of concern. Credit extension is low and declining, few jobs on a net basis are being created, and gross fixed capital formation, particularly from the private sector, is significantly below what is required. 

Capital outflows and a current account deficit exacerbate the difficulties that lie ahead. Exchange rate pressures are expected to intensify as markets adjust to the new pattern of global capital flows. Although monetary policy in the advanced economies remains accommodative, the process of normalisation has begun, and the spillovers have implications for our own monetary policy. 

The primary responsibility of the Bank is to keep inflation under control and ensure that inflation expectations remain well anchored. The depreciation experienced so far could improve our international competitiveness, provided that it is not eroded through higher wage and other input prices. 

Reserve Bank of South Africa Raises Rate by 50bps