SA raises rates to highest since 2009; Rand slumps to record lows

By Monique Vanek

South Africa’s central bank raised rates to the highest level in 14 years to rein in inflation expectations in an economy that’s expected to barely grow this year. The rand fell to a record low as Governor Lesetja Kganyago warned that further currency weakness is likely.

The monetary policy committee raised the benchmark interest rate to 8.25% from 7.75%, Kganyago said at a briefing north of Johannesburg on Thursday. The move was predicted by 21 of 25 economists in a Bloomberg survey.

The tightening brings the rate to its highest level since 2009. It was necessitated by recent rand weakness that led the central bank to raise its forecast for inflation to 6.2% for this year and 5.1% in 2024. Its estimates for core inflation, which excludes the cost of food, non-alcoholic drinks, fuel and electricity, were raised to 5.3% and 5% for this year and next. The bank’s inflation target is 3% to 6%. 

“At the current repurchase rate level, policy is restrictive, consistent with elevated inflation and risks,” Kganyago said. “The policy stance aims to anchor inflation expectations more firmly around the mid-point of the target band and to increase confidence of attaining the inflation target sustainably over time.”

All the MPC’s five members voted for the half-point increase. There have been a cumulative 475 basis points of interest-rate hikes since November 2021.

The rand weakened after Kganyago said that tighter global financial conditions raise the risk profiles of economies needing foreign capital. Daily electricity rationing and logistics-network constraints, the recent gray listing of the country by the Paris-based Financial Action Task Force and allegations by the US that Pretoria supplied weapons to Russia have all fed into the rand’s steep decline this year.

“Given upside inflation risks, larger domestic and external financing needs, and loadshedding, further currency weakness appears likely,” Kganyago said.

The currency traded 2.2% weaker at 19.6657 per dollar by 4:15 p.m. in Johannesburg, after hitting a record low of 19.7640. Yields on government debt maturing in 2026 fell 10 basis points to 9.65%. 

“The rand should strengthen after an interest rate hike, but given the poor reaction in the currency, the market seems to think that this is a potential policy mistake,” said Michelle Wohlberg, a fixed-income analyst at Rand Merchant Bank. “The yield curve has steepened aggressively post the rate hike as fiscal fears start playing in investors minds on the back of poor growth prospects.”

The central bank marginally raised its projection for South African gross domestic product growth to 0.3% this year. The prediction assumes power outages will be implemented for 280 days this year and 150 days next year. 

Thursday’s move will further weigh on household consumption spending that accounts for about two-thirds of GDP. That’s as higher interest rates make it more expensive for consumers to borrow as they confront a cost-of-living crisis stoked by high food prices.

Read More: South Africa Crisis Is Eroding a Basic Rule of Monetary Policy

Forward-rate agreements, used to speculate on borrowing costs, are now pricing in another 50 basis points of hikes by year-end. 

“The medication might be bitter but if the patient does not take the medicine they will end up in surgery and intensive care,” Kganyago said. “Our task as the South African Reserve Bank is in accordance with our mandate that says we must preserve price stability in the interest of balanced and sustainable growth.”

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With assistance from Prinesha Naidoo, Rene Vollgraaff and Mpho Hlakudi.

© 2023 Bloomberg L.P.

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