Reserve Bank raises interest rates by 25 basis points to 6%

Repo rate increased by 25 basis points to 6 percent, Reserve Bank Governor Lesetja Kganyago announced on Thursday.

Reserve Bank Governor Lesetja Kganyago on Thursday announced an increase in borrowing costs of 25 basis points to 6 percent.

The Reserve Bank kept borrowing costs unchanged since last July to help support an economy hit by strikes, power shortages and falling global metal prices.

While inflation has stayed within the 3% to 6% target since September, a weaker rand and rising electricity costs threatens to push it outside of that band.

Kganyago said, "The bank’s forecast assumes a moderate increase in oil prices over the forecast period. Domestic petrol prices have increased by about 90 cents per litre over in the past two months. But should current trends persist, a price reduction by 40 cents per litre is likely in August.

The MPC noted concern over the inflation outlook towards the end of 2015 and into 2016, and a weak rand.

Many economists expected interest rates to rise, as they forecast inflation to be at the upper end of the 3% to 6% target band by the end of the year and into 2016.

The decision is viewed as a borderline call, with the bank saying it remained in a hiking cycle while upside risks to inflation remained in place.

“The committee is concerned that failure to act against these heightened pressures and risks will cause inflation expectations to become entrenched at higher levels,” said Governor Lesetja Kganyago.

There is the possibility that the US will raise interest rates before the end of 2015, which would in all likelihood prompt a further rise in rates in a number of other countries, including SA.

An energy crisis is clouding the outlook for economic growth and inflation. Eskom Holdings SOC Ltd. is implementing regular rolling blackouts because it can’t meet power demand, hurting retailers and manufacturers. The state-owned utility is seeking to raise tariffs, even though its request for a 25% increase was denied last month.

Africa’s second-largest economy expanded 1.5% last year, the slowest growth since the 2009 recession.