Some analysts had expected the Sarb to keep interest rates unchanged to ease pressure on the struggling economy
THE SOUTH African Reserve Bank (Sarb) yesterday raised the benchmark repo rate by 25 basis points to 6.75 percent despite weak economic growth, saying it assessed the risks to the longer-term inflation outlook to be on the upside.
“The committee continues to assess the stance of monetary policy to be accommodative,” Governor Lesetja Kganyago told a news conference after the Sarb’s monetary policy committee concluded the last of its six annual meetings.
“Monetary policy actions will continue to focus on anchoring inflation expectations near the mid-point of the inflation target range in the interest of balanced and sustainable growth.”
Some analysts had expected the Sarb to keep interest rates unchanged to ease pressure on the struggling economy.
South Africa is currently in a technical recession after a consecutive contraction in GDP in the second quarter. The National Treasury has cut the overall economic growth forecast for 2018 to 0.7 percent from the 1.5 percent predicted in February.
The Sarb reduced its own growth forecast to 0.6 percent yesterday, down from 0.7 percent in September.
Regardless, Kganyago said the central bank had to act now against inflation as delaying the adjustment in interest rates could cause inflation expectations to become entrenched at higher levels.
Annual consumer inflation has risen steadily from 3.8 percent year-on-year in March to 5.1 percent in October, according to data from Statistics South Africa, but is still inside the Reserve Bank’s 3-6 percent target band.
Although the central bank’s primary mandate is to keep price pressures contained, it must also do so with consideration for the impact of monetary policy on the overall economy.
“The committee remains of the view that current challenges facing the economy are primarily structural in nature and cannot be solved by monetary policy alone,” Kganyago said.
“Prudent macroeconomic policies are essential to ensuring that growth is sustainable and that the economy is more resilient to shocks.”
He said monetary policy actions would continue to focus on anchoring inflation expectations near the mid-point of the inflation target range “in the interest of balanced and sustainable growth”.
Prior to yesterday’s decision, the central bank had kept the repo – at which it lends to commercial banks – steady at 6.5 percent since a 25 basis point reduction in March.
Yesterday’s increase means the prime rate at which commercial banks lend to consumers will also go up by 0.25 percentage points to 10.25 percent.
This will add pressure on households also grappling with unemployment of over 27 percent, tax rate increases and record-high fuel prices.
“For homeowners with mortgages and credit debt, as well as aspirant home buyers, the news of a 25 bps increase was not what they wanted to hear,” said Dr Andrew Golding, chief executive of the Pam Golding property group.
– African News Agency (ANA)