South Africa Raises Key Rate to 6.25%

The South African Reserve Bank unexpectedly hiked its benchmark repo rate by 25bps to 6.25 percent at its November 2015 meeting amid weak growth, saying inflationary pressures increased and an expected US rate rise will put further pressure on the rand. Policymakers also revised its growth and inflation forecasts down.
South African Reserve Bank | Joana Taborda | 11/19/2015 2:09:06 PM
The prime lending rate was also increased to 9.75 percent from 9.5 percent.

Excerpts from the statement issued by Lesetja Kganyago:

Since the previous meeting of the Monetary Policy Committee (MPC), the inflation forecast has remained relatively unchanged but the risks to the forecast have increased. The key risks are a marked depreciation of the rand; worsening drought conditions and their likely impact on food prices; and the possibility of additional electricity tariff adjustments. At the same time the economy remains weak despite an improved performance in the manufacturing sector, but both the mining and agricultural sectors appear to have contracted further in the third quarter. 

Although global financial markets have stabilised somewhat since the previous meeting, the outlook for emerging markets in particular remains challenging. The US Fed is likely to raise its policy rate in December, and further volatility in financial markets can be expected in the lead-up to this.

The latest inflation forecast of the Bank shows a slight near-term improvement, while the medium-term forecast is marginally higher. Inflation is now expected to average 4,6 per cent in 2015, and 6,0 per cent and 5,8 per cent in the next two years. The anticipated breach of the upper end of the target range in the first quarter of 2016 is now expected to average 6,4 per cent, compared with 6,7 per cent previously. The trajectory for the rest of the year is also slightly lower than previously forecast, with the temporary breach in the fourth quarter of 6,1 per cent. The forecast for 2017 follows a slow downward trend, with inflation still expected to measure 5,7 per cent in the final quarter. The changes in the forecast are due to a lower starting point for the forecast, lower international oil price assumptions, and an adjustment to fees for higher education which are more or less offset by a more depreciated starting point for the real effective exchange rate.

The domestic economic growth prospects remain subdued amid weak business confidence, but a further contraction in the third quarter is not expected. The Bank’s forecast for GDP growth has been revised down marginally for 2015 and 2016 to 1,4 per cent and 1,5 per cent, but remains unchanged at 2,1 per cent for 2017. The estimate of short-term potential output remains unchanged at 1,8 per cent for this year, rising to 2,1 per cent in 2017.

Against this difficult backdrop, the MPC decided to increase the repurchase rate by 25 basis points to 6,25 per cent per annum effective from 20 November 2015. Four members preferred an increase, while two members favoured an unchanged stance. 

Despite the increase, the MPC still views the monetary policy stance to be accommodative. The continuing challenge is for monetary policy to achieve a fine balance between achieving our core mandate of price stability and not undermining short-term growth unduly. Monetary policy actions will continue to focus on anchoring inflation within the target range while remaining sensitive, to the extent possible, to the fragile state of the economy. As before, any future moves will therefore be highly data dependent.

South Africa Raises Key Rate to 6.25%