Central Banks

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The South African Reserve Bank (SARB) increased its benchmark interest rate for the first time in over two years seeking to get ahead of what it sees as elevated inflation risks. The decision was split and comes depite cutting GDP and infaltion estimates.

South African Interest Rates

The SARB Monetary Policy Committee voted to raise the benchmark repurchase rate to 6.75 percent from 6.5 percent Thursday for the first time since March 2016.  The decision was split 3/3 votes each of the six panel members with half voting for the increase and the half voting for an unchanged stance, It is not clear how the split decision lead to a raise as Governor Lesetja Kganyago did not explain this to reporters.

It is assumed he had the swing vote as he said delaying the adjustment could cause inflation expectations to become entrenched at higher levels, which would require even stronger monetary response in future and the MPC still sees its stance as accommodative Bloomberg reported.

South Africa like other emerging nations has to balance the rate differential with the US Federal Reserve raising rates and currency flight and inflation and growth risks.  The South African rand’ has been rallying which together with the oil price collapse sees the SARB lower inflation expectations, forecasting inflation will stay well above 5 percent in the next two years and its quarterly projection model shows four more rate increases of 25 basis points each by the end of 2020.

South Africa’s economy hasn’t expanded at more than 2 percent annually since 2013 and the central bank predicts it will only reach that growth rate by 2020. The MPC cut its growth outlook for this year to 0.6 percent from 0.7 percent and said risks are tilted to the downside.

“Current challenges facing the economy are primarily structural in nature and cannot be solved by monetary policy alone,” Kganyago said.

South Africa Inflation Outlook

The rand rallied 1 percent to 13.7842 per dollar to the strongest intraday level since Aug. 10 on the report. The yields on benchmark government bonds due December 2026 fell 8 basis points to 8.97 percent, the lowest since Sept. 28 Bloomberg reported.

South Africa Growth Outlook

The official line is the central bank is most worried about second-round effects of inflation,  fiven the rate is below the target range.. It is also in most probability to stave off raids on it's currency such as Argentina has seen.

Interest Rates in South Africa averaged 12.56 percent from 1998 until 2018, reaching an all time high of 23.99 percent in June of 1998 and a record low of 5 percent in July of 2012.

Source Bloomberg

From The Traders Community Research Desk

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