Bloomberg: South Africa Raises Rate to 7% as Political Crisis Hits Rand

south africa rand

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, 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 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.”

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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.

A weaker rand and the worst drought in more than a century have boosted food costs and are upside risks to the inflation outlook, Kganyago said. Consumer prices rose 6.2 percent in January from a year ago, the fastest pace in 17 months.

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 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 and following allegations of cronyism in Zuma’s government.

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.

Kganyago declined to comment on the crisis, saying “the MPC does not deliberate on political developments.”

The currency gained 2.1 percent to 15.3369 per dollar as of 5:36 p.m. in Johannesburg. Yields on rand-denominated government bonds due December 2026 fell 33 basis points to 9.13 percent.

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.

Source: Bloomberg