South Africa: Central bank hikes key interest rate

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Economists warn rate hikes could impact heavily on already indebted consumers

By Hassan Isilow

PRETORIA, South Africa – South Africa’s central bank on Thursday announced an increase in its key interest rate.

“Given the deterioration in the inflation outlook, the Monetary Policy Committee has decided to increase the repurchase rate by 50 basis points to 6.75 percent effective from Jan. 29,” South African Reserve Bank (SARB) Governor Lesetja Kganyago told reporters in the capital Pretoria.

The repo rate is the rate the bank uses to lend money to commercial banks.

The prime rate, which banks charge for lending money to their customers, has been increased to 10.25 percent.

It was the first meeting of the SARB monetary policy committee for 2016.

In November, the Reserve Bank also increased the repo rate by 25 basis points.

KPMG senior economist Lulu Kruger told Anadolu Agency on Thursday that the rate increases will pressure consumers.

“South African consumers are highly indebted with low savings and they were used to low interest rates. Now they will feel the pinch in food prices and in paying off their debts.”

Kganyago said the Monetary Policy committee will remain focused on its core mandate of containing inflation. Depreciation of the rand, which has lost over 30 percent of its value against the dollar in the past seven months, is a major contributor to inflation, Kganyago noted.

Imports into the country are expected to cost more than in the past due to the high exchange rates impacting consumers.

The governor also said food prices were increasing as a result of the worsening drought that South Africa is currently facing.

“The outlook is complicated by the fact that domestic growth outlook has weakened further,” he added.

He forecast that growth is now expected to moderate to 0.9 percent in 2016, and would rise to 1.6 percent in 2017. In 2015, the country’s growth rate averaged about 1.3 percent.

Economist Azar Jammine said in a note on Thursday that increased interest rates in the U.S. would have to be compensated for in South Africa by substantially higher rates, in order to ensure that foreign capital continues to reach the country to fund the current account deficit.

Jammine said that higher interest rates would be negative for the medium- to longer-term outlook for the South African economy, with pressure on consumer spending and overall economic growth.

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