South African Monetary Policy Tightened for Second Time in Four Months

November 19, 2015

The monetary policy committee of the South African Bank has raised its repo rate to 6.25% from 6.0%.  There was an earlier 25-basis point hike on July 23 and before that increases of 25 bps in July 2014 and 50 bps in January 2014.  The rate was at a 30-year low of 5.0% from July 2012 until the January 2014 boost.

A statement from officials characterizes today’s decision as a difficult one and a preemptive action.  It’s difficult because of the weak growth outlook.  Officials expect GDP to expand just 1.4% in 2015, 1.5% in 2016, and 2.1% in 2017.  Unemployment exceeds 25%, and inflation currently happens to be in target.  Such will exceed target at times during the forecast horizon, and risks to the inflation forecast are skewed to the upside: “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.”  Officials explain the choice of acting now in the absence of runaway inflation as follows:  “given the relative stability in the underlying 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.”  In part, the MPC’s hand was forced by their belief that a federal funds rate hike in December is very likely and after having observed the rand to be more vulnerable to selling pressure from a U.S. policy shift than other emerging market currencies because South Africa has domestic deterrents to capital inflows like labor strife.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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