Reserve Bank hikes interest rates for first time in 3 years

The South African Reserve Bank raised its main lending rate by 25 basis points to 3.75% on Thursday, citing increased inflation risks.

Governor Lesetja Kganyago said while the monetary policy committee (MPC) expects inflation to stay close to the midpoint over the forecast period, inflation risks have increased and the level of policy accommodation remained high.

“Given the expected trajectory for headline inflation and upside risks, the committee believes a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates,” he said, commenting on a decision that was split 3-2 on the five-person MPC.

The rate hike is the first in three years and comes after the Bank flagged inflation risks in a monetary policy document last month.

The Bank has lagged other emerging market central banks, like those of Russia and Brazil, in raising rates because domestic inflation has risen more modestly.

The central bank slashed its repo rate by 300 basis points last year to a record low to keep the coronavirus-ravaged economy afloat.

But annual inflation has accelerated from January’s 3.2% before stabilising at 5% in September and October, above the midpoint of the bank’s 3-6% target range.

Thirteen out of 20 economists surveyed in a Reuters poll predicted the repo rate would be kept unchanged, while seven forecast a 25 basis-point increase.

The Bank’s forecasts this year’s economic growth at 5.2% and next year’s at 1.7%.  — Reported by Promit Mukherjee, Alexander Winning and Olivia Kumwenda-Mtambo, (c) 2021 Reuters