Reserve Bank hikes interest Rate

Pretoria – The Reserve Bank on Thursday raised the repo rate by 50 basis points to 6.75%.

“Given the deterioration in the inflation outlook, the MPC [Monetary Policy Committee] decided to increase the repurchase rate by 50 basis points to 6.75 % annum, effective from 29 January 2016,” Governor Lesetja Kganyago said.

This follows the first meeting of the year of the bank’s Monetary Policy Committee.

Briefing reporters, Governor Kganyago said three members of the MPC supported a 50 basis point increase, while two preferred a 25 basis point increase, while one member preferred no change to the repo rate.

Analysts had expected a hike in the repo rate.

In November, the central bank raised the repo rate by 25 basis points taking it to 6.25%.

The MPC said it views the stance of monetary policy to be accommodative.

“Despite the rate increase, the real repurchase rate remains low given the higher than expected inflation over the period. The MPC will remain focused on its core mandate of containing inflation within a flexible inflation targeting framework,” said the Governor.

In addition, the MPC is of the view that the growth constraints facing the economy are primarily of a structural nature and cannot be solved solely by monetary policy. It further added that it remains sensitive “to the extent possible, to the possible negative impact of monetary policy actions on cyclical growth”.

The bank said since its previous meeting the inflation outlook has deteriorated significantly, mainly due to exchange rate and food price developments.

In addition, the rand has depreciated considerably in response to domestic and external developments, while the impact of the worsening drought on food prices is becoming increasingly evident.

The latest inflation forecast of the bank shows a marked deterioration, having averaged 4.6% in 2015. The bank now expects inflation to average 6.8 % in 2016 and 7% in 2017.

Inflation is still expected to breach the upper end of the target in the first quarter of 2016. It is also expected to remain outside the target for the entire forecast period.

“A peak of 7.8% is expected in the fourth quarter of 2016 and the first quarter of 2017 followed by a moderation to 6.2 % in the final quarter of that year.

“The changes in the forecast are mainly due to a significantly more depreciated real exchange rate assumption, and higher expected food price inflation. These upward revisions more than offset the impact of the lower international oil price assumption,” said Kganyago.

Since the last meeting in November, the exchange rate of the rand depreciated markedly having depreciated by 13.5% against the US Dollar.

In 2015 growth was estimated to have averaged around 1.3% and is expected to moderate to 0.9 % in 2016, before accelerating to 1.6 % in 2017.

This compares with the previous forecast of 1.5% and 2.1 % for 2016 and 2017.

“Food prices remain a significant risk to the inflation outlook. The surge in agricultural commodity prices since early 2015 is beginning to impact on consumer food price inflation, and these pressures are likely to increase in the light of the persistent drought and the weaker exchange rate. This is despite continued moderation in global food prices,” said the Governor.

Earlier this week, Nedbank economists said the bank was likely to increase the repo rate by 50 basis points.

“We expect the MPC to depart from its recent convention by raising the repo rate by 50 basis points on Thursday instead of the usual 25 basis point move.

“The extremely weak rand as well as the anticipated rise in food prices will see consumer inflation rise well above the 6% upper target range later this year threatening financial stability as well inflation expectations,” said Nedbank.

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