South African Reserve Bank Raises Rates in Difficult Times

CEIC Macro Watch Global #47 - September 2, 2015 On July 23rd the South African Reserve Bank (SARB, the central bank) increased its main policy interest rate by 25bps, from 5.75% to 6.00%. The move was largely anticipated by analysts due to the increasing inflation rate and global events posing uncertainty to the South African economy. The Consumer Price Index (CPI) for all urban areas reached 4.97% in July 2015, increasing from 3.91% in February 2015. The surge in prices started in March 2015 after the sharp decline that had occurred in the previous eight months. The main drivers of the increase were the transport industry, alcoholic beverages and tobacco, and health products and services. The SARB traditionally tries to keep year-on-year (YoY) inflation between 3% and 6%, but the recent revisions to its forecasts now suggest that inflation at the end of this year will reach 5%, and will climb to 6.1% in the first quarter of 2016. In an attempt to curb these anticipated inflationary pressures, the authorities decided to tighten the monetary stance sooner than later, leaving room for small increases in the future rather than a larger rate hike, as seen in Turkey at the beginning of 2014. One of the reasons for the policy rate increase is the depreciating South African rand. The currency dropped by 2.6% in August 2015 compared to the previous month, and by 20% on an annual basis. The depreciation is being driven by weak commodity prices and by the widely expected increase in the US Federal Reserve’s policy interest rates, as well as the Greek debt crisis and the volatility in the Chinese equity markets. As one of the most liquid and traded emerging markets, South Africa has proven to be highly vulnerable to these global risk factors. Even though the move by the SARB is justified by the worsened fundamentals and the increasing external risks facing the economy, in times of a deteriorating economic outlook, a rate hike might not be the best solution. Real GDP increased by 1.5% YoY in the second quarter of 2015, constrained largely by the disruptions to electricity supply and weakened consumer spending and business activity, among other issues. Slow economic growth, a very high unemployment rate of 25% in Q2 2015, and falling consumer and business confidence are issues that need to be addressed, and are likely to be worsened rather than resolved by monetary tightening. By Petar Chavdarov in Bulgaria - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
2nd September 2015 South African Reserve Bank Raises Rates in Difficult Times

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