Skip to main content

Repo rate lifted to 6.25%

| Economic factors

The South African Reserve Bank has done what very few expected. It surprised the markets and consumers alike with an interest rate increase of a quarter percentage point yesterday, a move the bank justified by saying it was taking pre-emptive action to contain inflationary pressures, fallout from the drought and the effect of a jittery rand.

Moreover, the bank also slashed its growth forecast for this year and the next, acknowledging persistent weakness in key sectors such as agriculture, mining and construction. By all accounts, agriculture will see a third consecutive quarterly contraction in the quarter to September.

The rate hike pushed the bank’s benchmark repo rate to 6.25 percent and the prime lending rate to 9.75 percent. With the latest hike the bank has now boosted rates by a cumulative 1 percentage point since starting the tightening cycle in January last year.

The timing of the latest rate increase, however, means that there will be little cheer this Christmas as economists had hoped that households would get a reprieve heading into the holiday season to help spark a rebound in spending.


The rate hike, along with faltering consumer and business confidence, present the economy with an additional hurdle as households have already begun to defer big purchases, amid a weak job market and constraints arising from the debt burden.

“The rates increase inevitably now comes at a cost to the economy,” said Professor Raymond Parsons of the North-West University Potchefstroom Business School. “It is difficult to reconcile regular reductions in the bank’s economic growth forecasts with rising interest rates.”

Lefika Securities economist Colen Garrow said the bank’s decision reinforced the view that the economy was trapped in a “stagflationary environment”. He said attention would now swing to the impact next month’s pronouncements by credit rating agencies Standard & Poor’s and Fitch might have on the rand exchange rate, and on securities market flows which provide useful financing for a burgeoning deficit on the current account.

Reserve Bank governor Lesetja Kganyago cut the bank’s 2015 growth forecast to 1.4 percent versus a previous estimate of 1.5 percent. For next year, he said the bank now forecast gross domestic product (GDP) to rise by 1.5 percent, down from a previous forecast of 1.6 percent. Even so, Kganyago gave the first hint by any official that the economy might avert a technical recession in the third quarter.

“The domestic economic growth prospects remain subdued amid weak business confidence, but a further contraction in the third quarter is not expected,” he told reporters in Pretoria.

GDP shrank 1.3 percent in the second quarter as the country reeled from power outages and labour strife in the mines.

Kganyago said the manufacturing sector had “recovered somewhat” in the third quarter, mainly due to a “surprisingly strong” performance in September. But mining and agriculture were expected to see a further contraction in the third quarter, he added, noting that construction was also constrained amid a decline in new building plans passed.

Challenging outlook

Against this backdrop, formal sector employment trends were likely to disappoint further after the official unemployment rate jumped to 25.5 percent in the third quarter. Economist have said South Africa needs growth north of 5 percent if it is to stand a chance in reducing unemployment, poverty and rising inequality.

Looking at external factors likely to influence bank policy, Kganyago said “although global financial markets have stabilised somewhat since the previous meeting, the outlook for emerging markets in particular remains challenging”.

“The US Federal Reserve,” he said, “is likely to raise its policy rate in December, and further volatility in financial markets can be expected in the lead-up to this.”

But while the rate hike is ostensibly aimed at containing inflation, especially in view of the expected jump in food prices because of the damaging drought, the hike should also provide the bank with some breathing space by limiting the slide in the rand.

The rand rallied yesterday afternoon following the rate increase, pushing it almost below R14 to the dollar. Before the rates decision it had traded at about R14.10 and it was bid at R14.0363 at 5pm. Kganyago said the exchange rate was one of the bank’s biggest hurdles, along with the fact that the markets appeared to have not yet priced in the Fed’s rate hike.

Split decision

He said the decision to hike rates was not unanimous, with four members of the monetary policy committee (MPC) preferring an increase, while two of the members favoured keeping an unchanged stance.

In July Kganyago had raised interest rates in anticipation of the Fed’s hike by as early as September. But when a stream of US data appeared to contradict expectations of an increase, he decided to hold rates steady in September, aided partly by a drop in oil prices. Some questioned why the bank would seek to front-run the Fed when US data seemed uneven.

With yesterday’s decision, Kganyago said the MPC had to decide “whether to act now or later” when an even stronger monetary policy response would have more severe consequences for short-term growth.

Pin It

Related Articles

By: Yogashen Pillay – The Mercury Economists are predicting a big drop in petrol and diesel prices next month, saying it will bring much-needed relief to under-pressure consumers.
By: Jason Woosey - IOL Petrol and diesel prices are set to come down from Wednesday, June 5, according to a statement released by the Department of Mineral Resources and Energy (DMRE).
By: Opinion – IOL Business Report South Africans have been collectively waiting with bated breath for some small financial reprieve from the relentless price hikes of the past few years that have driven them to the brink of despair, chief among t...
Stats SA reports that retail trade sales increased by 2.3% year-on-year in February 2024. The largest contributor to this increase was general dealers (6.4% and contributing 2.8 percentage points).
By: Shaun Jacobs – Daily Investor Funding the government’s National Health Insurance (NHI) scheme would require a 31% increase in personal income tax, or a 6.5% increase in VAT, or a ten times increase in payroll tax, threatening South Afric...