Press Release - 2015/07/24 : HIGHER INFLATION OUTLOOK FORCES DIFFICULT DECISION ON INTEREST RATES

Speaking after the Reserve Bank Governor, Lesetja Kganyago’s, announcement of the rate hike this afternoon, SEIFSA Economist Tafadzwa Chibanguza said despite the heavily-constrained economy and the downside pressures on both the global and domestic economies, the South African Reserve Bank (SARB) has opted to maintain its credibility and its policy stance of tightening the monetary cycle.

According to Mr Chibanguza, of primary concern to the central bank and the reason for the 25 basis point increase include the higher inflation outlook expected to be driven, mainly, by global factors as well as domestic ones.

On the global front, Mr Chibanguza said that it was evident that rate normalisation in the United States was a major concern for the central bank.

“The bank is of the view that the United States will begin its rate hiking cycle this year and is, therefore, concerned of the impact that the move in the US rates will have on the Rand and the subsequent effect it would have on inflation. It is clear the bank does not want to get caught off-guard when the US rates are increased and has opted to act ahead of the US hikes. The Governor’s precaution should help to minimise the potential weakening of the rand,” Mr Chibanguza said.

Mr Chibanguza added that weaker commodity prices, a function of supply glut and weak global demand, did not bode well for the South African terms of trade and the Rand.

This was yet another reason motivating the Central Bank’s 25 basis point hike.

Mr Chibanguza said that there was notable acknowledgment by the SARB that the domestic economy was not in good shape and most aspects of the domestic economy would have, in fact, advocated for an unchanged repo rate.

These aspects include deteriorating consumption expenditure, deteriorating consumer confidence, moderating wage inflation and moderating food inflation at the consumer price index level.

“There is no doubt that, while the decision to increase rates is good for a credible monetary policy, consumers will have to bear the ultimate brunt,” Mr Chibanguza concluded.