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Surprise Repo Rate Hike

<img src="rate hike.jpg" alt="Rate hike" width="300" height="239">

Surprise Repo Rate Hike by SARB

The South African Reserve Bank governor, Lesetja Kganyago, announced a quarter of a percentage point increase in the benchmark interest rate at SARB’s monetary policy committee (MPC) meeting on Thursday, 19 November 2015. This is the second rate hike for the year – the first hike was in July when governor Kganyago also declared a 25 basis points repo rate hike.

The repo rate now stands at 6.25%. It was pointless to postpone the latest rate hike as further delay “could lead to second-round effects and require an even stronger response in the future, with more severe consequences for short-term growth,” the governor said.

Mr Isaac Matshego, a Nedbank economist, reckons SARB had positioned itself in a more comfortable place in order to avoid having to hike aggressively should inflation rose beyond 6% and the outlook remained low.

SARB is worried that the severe drought conditions plaguing the country will affect food prices negatively, causing inflation to spike. This, together with a possible increase in electricity tariffs as well as the depreciation of the rand, outweighs the benefits of low global oil prices. Governor Kganyago admitted that South Africa’s economy continue to be listless.

SARB anticipates the economy to grow only 1.4% this year and 1.5% in 2016, strengthening to a feeble 2.1% in 2017. The inflation outlook prediction for 2015 was revised to average 4.6% from 4.7%, while that of 2016 was lowered to 6% from 6.2%. It is anticipated that inflation will breach 6% in the first and last quarters of 2016. The rate hike cycle aims to temper the consequences.

The MPC’s statement mentions that “although global financial markets have stabilised 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.”

Governor Kganyago stated that SARB would monitor a Fed hike when it finally happened and will duly assess its possible effects on the rand and inflation outlook. He said: “If we are of the view that that is what it does (weaken the rand), we would then have to adjust policy.”

With the prime lending rate rising to 9.75%, heavily-indebted consumers are advised to think twice before embarking on Christmas shopping sprees.