Reserve Bank increases Interest rates, Rand slides

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South Africa's repo rate will increase by 25 basis points to 3.75%, South African Reserve Bank (Sarb) governor Lesetja Kganyago announced. South Africa's repo rate will increase by 25 basis points to 3.75%, South African Reserve Bank (Sarb) governor Lesetja Kganyago announced.

The Reserve Bank has raised the interest rates by 25 basis points to 3.75% after it concluded its monetary policy committee which took place on Thursday afternoon.

This means that the prime lending rate of commercial banks will increase to 7.25%.

Reserve Bank Governor Lesetja Kganyago says that since September, the rand has depreciated below its equilibrium and further increases can be expected in the 4th quarter.

The move to hike the rate comes amid increasing concerns around higher inflation and follows the conclusion of the Sarb’s last Monetary Policy Committee (MPC) meeting of the year.

It was arguably the most anticipated repo rate decision of the year, with economists and market watchers split on whether the Sarb would hold or increase the repo rate ahead of the decision.

After being little changed on Tuesday morning the rand deteriorated as the day went on as uncertainty about the outlook on domestic interest rates weighed.

The Rand changed hands to the dollar at R15.24/$ in early trade, while the yield on benchmark R2030, which moves inversely to the price, was at 9.38%.

By 3.30pm, however, the rand had fallen significantly, down to R15.73/$, 1.21% to R17.5269/€ and 1.75% to R20.7984/£.

“For this year and the next two years, headline consumer price inflation is revised slightly higher, to 4.5% for 2021 (from 4.4%), to 4.3% next year (from 4.2%), and to 4.6% in 2023 (from 4.5%). Headline CPI for 2024 is expected to be 4.5%,” said Kganyago.

“The risks to the short-term inflation outlook are assessed to the upside. Global producer price and food price inflation continued to surprise higher in recent months and could do so again. Oil prices have increased sharply, with current prices well above our forecasted levels for this year.”

Economic growth projections have been revised down to 5.2% for 2021 – from 5.3% before – reflecting “the larger negative effect on output than was previously estimated from the July unrest and other factors,” he said.

“While the domestic economy grew strongly in the first half of 2021, the second half of the year is expected to show mixed results,” Kganyago said.

Quarterly, growth for the third quarter of 2021 has been revised to -2.5% from -1.2% before. However, growth in the fourth quarter is forecast at 2.6% versus 1.6% before.

“Despite these quarterly revisions, the annual growth rate in GDP for 2021 reflects a healthy bounceback from the economic effects of the pandemic. In the next two years, economic growth is expected to align with a low rate of potential growth,” he said.

Looking ahead

This latest MPC meeting was the last to be held in 2021, with rates expected to continue rising in 2022.

Kganyago noted that the implied policy rate path of the Quarterly Projection Model (QPM) indicates an increase of 25 basis points in the fourth quarter of 2021 and further increases in each quarter of 2022, 2023 and 2024.

“As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks,” he said.

“Given the expected trajectory for headline inflation and upside risks, the Committee believes a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates. Economic and financial conditions are expected to remain more volatile for the foreseeable future.”

The governor said that while the environment remains uncertain, policy decisions by the Reserve Bank will continue to be data-dependent.

“Current repurchase rate levels reflect an accommodative policy stance through the forecast period, keeping financial conditions supportive of credit demand as the economy continues to recover,” he said.


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