Pretoria - The Reserve Bank has raised the repo rate by 25 basis points to 6.25%.
“The Monetary Policy Committee [MPC] decided to increase the repurchase rate by 25 basis points to 6.25% per annum effective from 20 November 2015,” Reserve Bank Governor Lesetja Kganyago announced on Thursday.
The decision follows a three-day meeting of the committee.
Kganyago said that at the meeting, which was the last one for the year, four members of the committee had preferred an increase while two favoured an unchanged stance.
The MPC said that upside risks to the country’s inflation outlook are more pronounced. These risks relate to the persistent exchange rate depreciation, electricity tariffs and food prices, and are assessed to outweigh possible downside risks from lower international oil prices and subdued exchange rate pass-through.
Kganyago said while these factors cannot be dealt with directly through monetary policy, the concern of the committee is that failure to act could cause inflation expectations to become unanchored and generate second-round effects and more generalised inflation.
“Although core inflation has remained steady and inflation expectations to date have been relatively anchored, they remain at uncomfortably elevated levels. The general approach of the MPC is to attempt to see through exogenous shocks and react to second-round effects,” he said.
The bank said shocks of a persistent nature, for example extended periods of currency depreciation or drought, or multi-year increases in electricity prices “make it more difficult to disentangle these first and second round effects”.
“In the absence of demand pressures, the MPC had to decide whether to act now or later. On the one hand, given the relative stability in the underlying of core inflation, delaying the adjustment could give the MPC room to re-assess these unfolding developments at the next meeting, and avoid possible additional headwinds to the weak growth outlook. On the other hand, delaying the adjustment further could lead to second-round effects and require an even stronger monetary policy response in the future, with more severe consequences for short-term growth.”
Despite the increase, the MPC still views the monetary policy stance to be accommodative.
The bank said since the previous meeting in September, the country’s economy remains weak despite an improved performance in the manufacturing sector.
The Consumer Price Index (CPI) for October came in at 4.7%, in line with market expectations.
Following the release of CPI figures by Statistics South Africa on Wednesday, Nedbank economists said the bank was likely to raise the repo rate.
“Although inflation looks relatively under control at the moment, and the economy remains under pressure, we still believe that the Reserve Bank will probably raise rates tomorrow ahead of a likely US interest rate lift off in December.
“The bank may feel more justified now to raise rates than in July as the inflation outlook has deteriorated due to the weaker rand and higher food prices. We expect the main part of this hiking cycle to be in the first half of 2016, as the MPC responds to rising inflation and interest rate normalisation in the US,” said the economists.
The latest inflation forecast of the Reserve Bank shows a slight near-term improvement, while the medium-term forecast is marginally higher.
Inflation is now expected to average 4.6 % in 2015 and 6 % and 5.8 % in the next two years. The anticipated breach of the upper end of the target range in the first quarter of 2016 is now expected to average 6.4% compared with 6.7% previously.
The bank’s forecast for GDP growth has been revised down marginally for 2015 and 2016 to 1.4% and 1.5%.
The repo rate was last hiked by 25 basis points in July. – SAnews.gov.za
