Banking Economy Finance Government South Africa

South Africa Raises Interest Rate to 6.25% Before Fed Tightening

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South Africa’s central bank increased its benchmark interest rate for the second time this year, positioning itself ahead of possible currency turmoil if the U.S. Federal Reserve tightens policy for the first time in almost a decade next month.

The repurchase rate was increased by 25 basis points to 6.25 percent, Governor Lesetja Kganyago told reporters on Thursday in the capital, Pretoria. That was in line with the forecasts of 10 of the 26 economists estimates compiled by Bloomberg. The rest expected no change.

The rand fell to a record low of 14.4410 against the dollar this week and has lost almost a fifth of its value this year, adding to pressure on inflation and complicating the job of policy makers seeking to support a weak economy.

“The Reserve Bank is concerned with the outlook for inflation,” Razia Khan, chief Africa economist at Standard Chartered Plc. in London, said in an e-mailed note to clients before the decision. “Even given weak growth, inflation expectations may be difficult to contain, and the pace of pass-through from the rand into inflation — very subdued to date — might alter.”

Inflation accelerated to 4.7 percent in October from 4.6 percent in the previous month, remaining inside the bank’s 3 percent to 6 percent target band. The economy contracted an annualized 1.3 percent in the second quarter as low global demand, falling metal prices and electricity shortages curbed output.

African central banks from Zambia to Uganda have been bucking a global trend this year by raising interest rates to ward off inflation pressure stemming from weaker currencies. Ghana and Mozambique raised borrowing costs on Nov. 16, while Kenya left its key rate unchanged a day later after 300 basis points of increases earlier this year. Before today, the Reserve Bank had raised the repurchase rate by 1 percentage point since January last year.

Source: Bloomberg

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