SOUTH Africa’s interest rates will rise by 50 basis points from four-decade lows following this week’s three-day meeting of the Reserve Bank’s monetary policy committee (MPC).
The MPC adjusted its key repurchase rate to 5.5%. The prime lending rate therefore also increases to 9%.
Recent weakness in the rand had given rise to the view that the Bank may have to increase interest rates sooner than expected.
A BDlive median forecast from a survey of 11 economists was for no change in lending rates this week.
“Exchange rate pressures are expected to intensify as markets adjust to the new pattern of global capital flows,” Reserve Bank governor Gill Marcus said on Wednesday.
“The primary responsibility of the Bank is to keep inflation under control and ensure that inflation expectations remain well anchored.”
Ms Marcus said the rate decision had not been influenced by Turkey’s surprise huge rate hike on Tuesday and was not aimed at affecting the exchange rate.
However, it came as the rand headed towards five-year lows during an emerging-market sell-off that began last week.
Financial markets, however, appeared to view the rate rise as insufficient and the rand was down more than 2% after the rate decision at R11.25/$, getting closer to a five-year low hit last week.
Ms Marcus said: “The forecast average inflation rate for 2014 is 0.6 percentage points higher at 6.3%.
“Inflation is expected to breach the upper end of the target range in the second quarter of 2014 and to reach a peak of 6.6% in the final quarter of the year before declining to 6% in the second quarter of 2015.
“The deterioration as a measure of underlying inflation continues to be driven primarily by the lagged effects of the depreciation of the rand exchange rate”.
She said the MPC had carefully considered the economic challenges facing South Africa and the appropriate policy response. “On the one hand, inflation forecasts indicate the possibility of being out of the target range for an extended period, largely due to the impact of the depreciating currency,” she said.
“The risks to the inflation forecast are seen to be significantly on the upside. Large adjustments to the exchange rate will inevitably impact on inflation, even in conditions of relatively low pass-through such as we have been experiencing,” Ms Marcus said.