South Africa Raises Key Rate to 6%

South African Reserve Bank hiked its benchmark repo rate for the first time in 12 months by 25bps to 6 percent in July. Policymakers said upside risks to inflation remain elevated while the rand is weak and growth is subdued.
Reserve Bank South Africa | Joana Taborda | 7/23/2015 2:59:54 PM
The prime rate was also increased by 25bps to 9.5 percent.

The central bank hiked inflation forecasts for 2015 to 5 percent from 4.9 percent. Forecasts for the first two quarters of 2016 have also been revised up by 0.1 percent to 6.9 percent and 6.1 percent respectively, with a return to target by the third quarter.

The economy expanded 1.3 percent on quarter in the first three months of 2015 and the central bank expects second quarter figure to be similar. However, forecasts for full year growth were lowered to 2 percent in 2015 and 2.1 percent in 2016.  

Excerpts from the statement issued by Lesetja Kganyago:

Inflation is expected to breach the upper end of the target range for two quarters, and the medium term trajectory remains uncomfortably close to the upper end of the target range. The upside risks make this trajectory vulnerable to any significant changes in inflation pressures.

Although the risks of higher electricity tariffs did not materialise as yet, other upside risks persist. The rand remains vulnerable to global market reaction to US monetary policy normalisation, particularly in the context of South Africa’s twin deficits. The pressures on the exchange rate have been exacerbated by the recent significant decline in commodity prices, which are likely to impede the favourable current account adjustment. Some of the rand adjustment has already occurred since the previous meeting, but further reaction to US monetary policy tightening could cause inflation to diverge even further from target, and set in motion an exchange rate inflation spiral. Further upside risks are expected to come from food prices, which have yet to react to significant increases in spot prices of agricultural commodities.

The MPC has indicated for some time that it is in a hiking cycle in response to rising inflation risks, and a normalisation of the policy rate over time. The MPC is cognizant of the fact that domestic inflation is not driven by demand factors, and the outlook for household consumption expenditure remains subdued. 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. 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 MPC has therefore decided to continue on its path of gradual policy normalisation. Accordingly, the repurchase rate will increase by 25 basis points to 6,0 per cent per annum with effect from Friday 24 July 2015. Four members favoured a 25 basis point increase, while two members favoured an unchanged stance.

South Africa Raises Key Rate to 6%