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The deteriorating inflation outlook and South Africa’s attempts to remain ahead of US rate hikes had supported the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) decision to lift the interest rates to 6%.
Despite the potential hit to indebted consumers, the bank, after keeping its benchmark rate steady at 5.75% since July last year, on Thursday announced a 25-basis-point hike in interest rates to maintain its credibility and monetary policy stance, while staving off inflation.
“The bank is of the view that the US 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,” Steel and Engineering Industries Federation of Southern Africa economist Tafadzwa Chibanguza said on Friday.
With a heavily constrained economy amid global and domestic downside pressures, the excess supply and weak global demand, as well as the currently weak commodity prices, did not bode well for trade or the rand.
The interest rate rise could minimise the impact of rand weakening, with SARB acting ahead of the US to avoid being caught off-guard when the US rates are increased.
Chibanguza pointed out, however, that the bank’s decision served as an acknowledgment that the domestic economy was “not in good shape”, with factors such as deteriorating consumption expenditure, deteriorating consumer confidence, moderating wage inflation and moderating food inflation at the consumer price index level indicating a desire for an unchanged repo rate.