Delivering what has been described as the most important Monetary Policy Committee (MPC) meeting announcement since the dawn of SA’s democracy, Kganyago had no choice but to raise the repo rate.
“Since the previous MPC, the inflation outlook has deteriorated significantly, mainly due to exchange rate and food price developments . . . The Committee faced the continuing dilemma of a deteriorating inflation environment and a worsening growth outlook. Given the deterioration in the inflation outlook, the MPC decided to increase the repurchase rate by 50 basis points to 6,75% per annum. The MPC still views the stance of monetary policy to be accommodative,” Kganyago said.
With inflation recently reaching its highest level for 2015, economists say the Sarb was forced to enforce the hike in order to protect the country’s weak currency and stagnating economy.
“Inflation is never good for an economy even if you have to pay more on your borrowing costs when you have credit cards or a home loan. It ultimately is a good thing when you find a central bank that maintains some level of lower inflation because in theory it will support growth and make the country more stable going forward,” Investment Solutions Chief Economist Lesiba Mothata said in an interview with Power FM.
Kganyago stressed that the depreciation of the rand had been “in excess of its emerging markets peers”, explaining that the rand had deteriorated by 13,5% against the dollar and 15,2% against the euro since the MPC’s last meeting in November.
While the hike signals bad news for indebted consumers whose home loan and credit card repayments will increase, Inkunzi Wealth Group CEO Owen Nkomo welcomed the 50 basis points hike, saying it was the right decision for the rand, particularly in light of the threat that a recovery in the global oil price poses.
Nkomo said there is now a greater chance for the rand to strengthen, which would lower the chances of a mass market sell-off of the rand.
It will also potentially stave off downgrades from credit ratings agencies for the time being.
Inflation forecasts for 2016 are expected to average 6,8% and 7% in 2017 driven by higher food prices, the rand’s devaluation and electricity tariff hikes.
Kganyago warned that SA’s domestic economic growth outlook remains weak and that the Sarb will likely make further downward revisions to its GDP forecasts.
Absa Senior Economist Jacques du Toit said: “Interest rates are projected to rise further during the course of the year, which will lead to higher debt repayments over a wide front and contributing to increased financial pressure on consumers.”
“In view of these developments and expectations, banks will continue to closely monitor economic and consumer-related trends that may impact their risk appetite and lending criteria.”