South Africa Raises Benchmark Rate to 7% as Political Crisis Roils Rand

  • Committee was split on whether to increase borrowing costs
  • Inflation accelerated to 17-month high of 6.2% in January

South Africa’s central bank raised its benchmark interest rate for a second time this year in a decision that split the Monetary Policy Committee and as a political crisis engulfing the country hurts the currency.

The repurchase rate was increased to 7 percent from 6.75 percent, Governor Lesetja Kganyago told reporters on Thursday in the capital, Pretoria. Half of the 30 economists surveyed by Bloomberg forecast the rate will stay unchanged, 14 expected a 25 basis-point increase and one predicted 50 basis points. Three of the six MPC members favored a quarter-point increase, while the rest favored no change, the governor said.

“Given the upside risks to the inflation forecast and the protracted period of the expected breach, the MPC decided that further tightening was required,” Kganyago said. “The committee faced the continuing dilemma of a deteriorating inflation environment and a worsening growth outlook.”

The rand’s 13 percent plunge against the dollar in the past six months has forced the Reserve Bank to continue tightening policy even as the economy’s outlook deteriorates and credit-rating companies threaten to downgrade the nation’s debt to junk. The bank’s job has been made tougher by weakening investor confidence since December, when President Jacob Zuma unexpectedly fired his finance minister.

“This rate hike is not the last one for the year,” Bart Stemmet, an economist at NKC African Economics, said by phone from Paarl, near Cape Town. “They certainly showed that they want to be aggressive and have an impact.”

Inflation Forecast

While the central bank lowered its inflation forecast for the year to an average of 6.6 percent from 6.8 percent, it expects price growth to exceed the 3 percent to 6 percent target range until the third quarter of 2017. The weaker rand and the worst drought in more than a century pose upside risks, Kganyago said. 

Consumer prices rose 6.2 percent in January from a year ago, the fastest pace in 17 months. The bank lowered its growth forecast for this year to 0.8 percent from 0.9 percent.

Political tensions heightened this week after the current Finance Minister Pravin Gordhan accused the police of making “threatening” statements against him, causing the rand to plunge.

The rand reversed some losses on Wednesday after a deputy minister said he was offered the finance minister’s post by Zuma’s friends, allegations that may undermine the president’s power. The currency also benefited from comments from the Federal Reserve, which scaled back expectations for the path of interest-rate increases.


Rand Gains

The currency gained 2.4 percent to 15.2931 per dollar as of 5:29 p.m. in Johannesburg. Yields on rand-denominated government bonds due December 2026 fell 30 basis points to 9.17 percent.

Kganyago declined to comment on the Finance Ministry crisis, saying the MPC doesn’t deliberate on political developments and that the Reserve Bank’s independence is not under threat. The bank’s determined action may help to improve credibility in policy, Gina Schoeman, an economist at Citigroup Inc. in Johannesburg, said.

“The Reserve bank’s institutional strength is very important,” Schoeman said by phone on Thursday. “It is important that the Reserve Bank is independent and tackles inflation when it needs to.”

Moody’s Investors Service is reviewing South Africa’s credit rating this week for a possible downgrade, which will put its assessment one level above junk and on par with that of Standard & Poor’s and Fitch Ratings Ltd.

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