South African Reserve Bank Repo Rate Hiked Unexpectedly and by 50 Basis Points

January 29, 2014

South Africa fits the profile of many battered emerging markets (EM): sub-potential and slowing growth, rising inflation exacerbated by capital outflows and the resulting currency depreciation, and sizable current account and fiscal deficits.  Many EM central banks have been forced to raise interest rates under difficult circumstances.  Monetary officials tightened by 50 basis points in Brazil on January 16, 25 bps in India on January 28, and 425 bps in Turkey yesterday at midnight.  Last year, Bank Indonesia lifted its interest rate by 50 bps at an unscheduled meeting on August 29 and followed that initial action with 25-bp hikes in both September and November.  All of these tightenings either surprised analysts expected no change or exceed expectations of the size of the moves, and now the South African Reserve Bank joins the club with a 50-basis point increase of its repo rate to 5.5%.  This is the first change since a 50-basis point cut in July 2012 to a 40-year low of 5.0% that culminated a ten-step string of reductions — 500 basis points between December 2008 and August 2009, two 50-bp cuts in the first half of 2010, another in July 2010 and a final cut in July 2012.

The statement released by South Africa’s central bank gives an excellent summary of the predicament facing not only its monetary authorities but those of many other emerging markets as well.  Part of the cause lies in their own economic vulnerabilities, but external factors like Fed tapering and unrelenting fears about a Chinese economic slowdown have been the true catalyst causing trouble to happen now and not sooner.  The statement concludes with acknowledgement that the decision was a difficult one but at the end of the day the main mission remains price stability and preventing higher expected inflation.  The door is left open to more restraint should the rand continue to fall and threaten higher inflation.

Capital outflows and a current account deficit exacerbate the difficulties that lie ahead. Exchange rate pressures are expected to intensify as markets adjust to the new pattern of global capital flows. Although monetary policy in the advanced economies remains accommodative, the process of normalization has begun, and the spillovers have implications for our own monetary policy. The primary responsibility of the Bank is to keep inflation under control and ensure that inflation expectations remain well anchored. The depreciation experienced so far could improve our international competitiveness, provided that it is not eroded through higher wage and other input prices.

In the light of these circumstances and taking account of policy trade-offs, the MPC has decided to increase the repurchase rate by 50 basis points to 5.5 per cent per annum as of 30 January 2014. The MPC is of the view that, notwithstanding this increase in the repo rate, monetary policy remains accommodative. Further moves in the repo rate will be highly data dependent. We will continue to monitor developments closely and will not hesitate to act as required in keeping with our mandate.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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