South Africa Raises Key Rate for First Time in Three Years
(Bloomberg) -- South Africa’s central bank raised interest rates for the first time in three years, unwinding some of the extraordinary monetary policy stimulus aimed at shoring up an economy ravaged by the coronavirus pandemic.
The monetary policy committee increased the repurchase rate to 3.75% from a record-low 3.5%, Governor Lesetja Kganyago said Thursday in an online briefing. That’s the first hike since November 2018 and follows 300 basis points of easing last year.
Of the five members on the panel, three favored a 25-basis point hike and two preferred an unchanged stance, marking the first time since the MPC started giving a breakdown of voting in 2016 that the committee has changed the rate -- up or down -- in a meeting following a unanimous hold. Eleven of the 21 economists that took part in a Bloomberg survey predicted the move with the remainder expecting an unchanged stance.
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The rand was 1% weaker by 4:20 p.m. in Johannesburg, having earlier traded as much as 1.7% lower after the Turkish central bank’s decision to cut rates for the third time in as many months triggered a plunge in the lira.
“We needed to send the right message to global financial markets, given what’s happening in Turkey,” said Gary Booysen, a portfolio manager at Johannesburg-based brokerage Rand Swiss. “This sets us apart from emerging market peers and shows a prudent and conservative Reserve Bank.”
The central bank’s move should leave domestic markets less vulnerable to the prospect of more aggressive Federal Reserve tapering, though it wasn’t an attempt to preempt policy changes in advanced economies, Kganyago said in response to journalists’ questions.
“We took this move based on our assessment of the domestic and global economic conditions and our own forecast of what the growth and inflation outlook would look like,” he said.
While the central bank continued to warn about upside risks to its inflation outlook, these are expected to remain transitory. Headline consumer price growth is now seen averaging close to 4.5% -- the midpoint of the bank’s target band at which it prefers to anchor inflation expectations -- through 2023.
Core inflation, which excludes the prices of food, non-alcoholic drinks, fuel and electricity, is set to remain benign through the forecast period, suggesting there is little demand pressure in an economy that’s slowly recovering from its deepest contraction in at least 27 years.
The implied policy rate path of the central bank’s quarterly projection model now indicates one 25-basis point rate increase in each of the next 12 quarters. While that could take the benchmark upto 6.75% by the end of 2024, that is “unlikely to actually happen,” said Peter Attard Montalto, head of capital markets research at Intellidex.
“I see the MPC quite happy to stop at 5.5%-6%,” he said, citing Kganyago’s repeated assertions that the model is merely a guide.
The central bank cut its economic growth forecast for 2021 to 5.2% from 5.3%. The recovery would have been stronger were it not for deadly riots and port stoppages that disrupted activity in the third quarter, it said.
Short-term growth prospects remain fragile and will likely be affected by a resumption of rolling power outages and Covid-19 vaccine hesitancy that leaves the country vulnerable to new strains of infection and stricter lockdown measures.
“The growth constraints are not necessarily on the monetary side, but rather on structural constraints such as labor-market inflexibility, skills levels, electricity supply and the regulatory burden on small, medium- and micro- enterprises,” said Carmen Nel, an economist and macroeconomic strategist at Matrix Fund Managers. “If it is correct that small hikes now prevent aggressive hikes later, then this move will not be costly for the economy.”
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