The South Africa Reserve Bank unexpectedly increased its benchmark interest rate, following central banks in emerging markets from Turkey to Brazil that tightened monetary policy to bolster their currencies.
All 25 economists surveyed by Bloomberg last week predicted the rate will stay unchanged as the central bank focuses on supporting an economy that’s been buffeted by slower global demand and mining strikes. Those concerns are being overtaken by a weaker rand that’s fueling inflation and threatening the bank’s 3 percent to 6 percent target. Turkey raised borrowing costs after a late-night emergency meeting, while India unexpectedly increased its key rate yesterday.
“They have got to maintain credibility,” John Loos, an economist at First National Bank, a unit of FirstRand Ltd., said in a phone interview from Johannesburg. “They do have an inflation (SACPIYOY) target. They have been accommodative of growth in recent years but you can’t really ignore what is now a massive rand depreciation and the potential inflation impact.”
Today’s move didn’t help to support the rand, which fell 1.9 percent to 11.2516 against the dollar as of 5:30 p.m. in Johannesburg, extending its slide this year to 6.8 percent.
Marcus said the rate increase wasn’t aimed at supporting the currency. The rand’s decline after she announced the decision was due to heightened “uncertainty” in the market, with traders focusing on the U.S.’s Federal Open Market Committee statement at 2 p.m. in Washington, she said.
The statement may give details of a further reduction in the Fed’s bond purchasing program that’s helped to support inflows into emerging markets.
“If you’re trying to compete for the carry trade, you’d have to do a lot more than 50 basis points,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd. in Johannesburg, said by phone. “If the Fed continues its tapering, the rand could extend some further.”
Inflation accelerated in December for the first time in four months to 5.4 percent. The inflation rate will probably breach the upper end of the target in the second quarter, and average 6.3 percent in 2014, up from a previous estimate of 5.7 percent, Marcus said.
“The risks to the inflation forecast are seen to be significantly on the upside,” Marcus said. “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.”
Turkey’s central bank raised its one-week repo rate by 5.5 percentage points to 10 percent. India increased its key rate to 8 percent from 7.75 percent, while Brazil has boosted rates for six straight meetings.
South African forward-rate agreements had priced in a 50 basis-point increase by March. Contracts starting in two months, used to lock in borrowing costs, climbed 48 basis points from the beginning of January until yesterday and rose 33 basis points to 6.08 percent today.
Marcus said the decision wasn’t unanimous, with two of the seven MPC members opting to keep interest rates unchanged.
“The MPC is of the view that, notwithstanding this increase in the repo rate, monetary policy remains accommodative,” she said. “Further moves in the repo rate will be highly data dependent.”
The central bank cut its economic growth forecast for this year to 2.8 percent from 3 percent. The forecast for 2015 was reduced to 3.3 percent from 3.4 percent.
“Our growth risks are still predominantly to the downside,” Jana le Roux, an analyst at ETM Analytics, said by phone from Johannesburg. “There is very little to suggest that we will be able to start producing more and that exports will improve, regardless of the weaker rand. The growth issue will get added focus now that the bank hiked rates.”
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