The SARB Raises the Repo Rate

SOUTH AFRICA - In Brief 29 Jan 2014 by Iraj Abedian

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The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) opted today to increase the benchmark interest rate by 50 basis points to 5.5 per cent a year. On the face of it, it appears that, after a protracted period of inaction, the SARB preferred this time to join the monetary policy tightening bandwagon as has recently been the case with other emerging market economies (EMEs)’ central banks. The Bank cited the flight of capital away from emerging markets economies and the ensuing currency depreciation as key factors explaining the worsening in its inflation outlook. As such, it seems the SARB hopes that its decision to increase the repo rate will help allay inflationary risks. However, we are of the view that today’s decision will in all likelihood have little effect on (1) investors’ appetite for SA assets – as this has recently been largely dependent on external factors such as the normalization of monetary policy in the US - and (2) the political economy and industrial relations disruptions that have crippled key export sectors, leading to weakening of the rand. Given the current “risk-off” environment characterizing EMEs, a mere 50 basis points hike in the repo rate does not seem sufficiently robust to sway investors’ sentiment. In any case, the SARB’s belief that monetary policy remains accommodative despite today’s hike is quite telling. By this stance, the SARB could be implying the possibility of more rate hikes in the near future… On the flip side, SA consumers will almost immediately feel the pinch of today’s rate hike or any such moves in the future. Given a backdrop of a faltering recovery, the SARB’s decision will prove damaging for con...