Global and domestic inflation pressures and a hawkish Fed tone overnight have forced the South African Reserve Bank to increase interest rates for a second consecutive time.
The rand, which opened local trade at R15.42, strengthened 0.63% from its overnight close to R15.24/$ just before the SARB’s announcement and changing hands at R15.28 shortly thereafter.
The announcement comes as the local consumer price index (CPI) for December came in at 5.9%, threatening to breach the upper limit of the SARB’s inflation target range of between 3% and 6% and after the bank hiked rates for the first time in three years in November by 25 basis points to 3.75%. The latest hike of 25 basis points takes the repo rate to 4% and the prime lending rate to 7.5%.
SARB governor Lesetja Kganyago mentioned the current supply shocks that have filtered into consumer prices and thus revised inflation forecasts higher.
The decision to hike was split 4-1.
Citing rising global producer price and food price inflation, surging oil and electricity prices and other administered prices, Kganyago warned that the risks to the short-term inflation outlook are assessed to the upside.
Many African countries are expected to leave their interest rates untouched focusing on recovery before inflation, but South Africa is acting differently, one reason being its capital markets are closely tied to the markets of developed markets, where we are seeing interest rate hikes.
The local hike comes after the Fed’s decision last night to leave the interest rates in the US untouched. However, the decision was combined with a hawkish speech by Fed Chair Jerome Powell, resulting in markets all over the world preparing for a year where central banks move away from the accommodative monetary policy put in place to deal with the economic effects of the pandemic.
In his speech Powell stated that inflation was high and getting worse and if that continues the Fed’s policy “would have to reflect that”. The effect being that markets in Europe as well as the JSE fell heavily in early morning trade, albeit the JSE was recovering somewhat during the course of the day. The All Share index was down 1.04% at 73,028.59 points at the time of the rates decision announcement.
