Feb 04, 2016 South Africa’s Reserve Bank recently raised its benchmark repo rate by half a percentage point, saying the outlook for inflation had deteriorated significantly even as economic growth slowed.
The South African rand, whose decline over the past year has helped to fuel price pressures, rallied to a three-week high after the rate increase.
Speaking at a news conference after the bank’s Monetary Policy Committee held its first meeting of the year, Lesetja Kganyago, governor of the Reserve Bank said:
“Given the deterioration in the inflation outlook, the MPC (Monetary Policy Committee) decided to increase the repurchase rate by fifty basis point, to 6.75 percent per annum effective from the 29 of January 2016,”
Kganyago added that the rand exchange rate had declined by 13.5 percent since the last MPC meeting in November, which has contributed significantly to the deterioration in its inflation forecast.
“Despite the rate increase, the real repurchase rate remains low given the higher expected inflation over the period. The MPC will remain focused on its core mandate of containing inflation, within a flexible inflation targeting framework,”
Kganyago conceded that the rate decision had been complicated by a worsening growth outlook for the country after the central bank cut its growth forecast for 2016 to 0.9 percent from 1.5 percent.
The rate decision was in line with moves by central bankers across emerging markets to prop up their currencies.
Commenting on this, economist Isaac Matshego said:
“As part of the emerging markets we have suffered from that, investors have pulled some money out of South Africa, out of our bond market, out of our equity market and as a result of that we have seen the rand coming under a lot of pressure,”