PRETORIA, South Africa—South Africa’s central bank raised its main interest rate on Thursday in an effort to curb persistent rising inflation.
The South African Reserve Bank raised its key interest, or “repo”, rate by a quarter of a percentage point to 6%, in line with expectations from the majority of economists.
The bank raised rates twice last year: by 0.50 point in January and by 0.25 point in July. Persistent slow economic growth has held back the bank from raising rates as high and as rapidly as Governor Lesetja Kganyago has said he would like.
But South Africa’s annual inflation rate has recently been ticking upward, to 4.7% in June from 3.9% in February and 4.6% a month earlier, though the June figure missed economists’ expectations for a jump up to 5%. On Thursday, the central bank raised its 2015 inflation forecast to 5%, from 4.9% in May.
“The persistence of forecast inflation at elevated levels and the continued upside risks to the outlook remain a concern,” Mr. Kganyago said Thursday, adding that headline inflation is expected to breach the upper end of the bank’s target ceiling of 6% annually during the first two quarters of 2016.
But Mr. Kganyao said South Africa’s economy will likely grow just 2% this year. That is far below the 7% or 8% annual rate he has said is necessary to dent an official unemployment rate of over 26%, an 11-year high.
“Domestically, the growth outlook remains weak, as both supply and demand sides remain constrained amid declining business and consumer confidence,” he said. Power outages, electricity tariff hikes, higher food prices, low commodity prices and contentious wage talks between gold mining companies and their workers’ unions are all expected to weigh heavily on the economy for the rest of 2015.
Mr. Kganyago also said the bank needs to raise rates to protect South Africa’s fragile economy and its rand currency, which fell to a 14-year low against the dollar in June, from an exodus of international capital after the Fed’s expected rate hike later this year.
“The risks associated with financial market volatility related to the timing of the first increase in the U.S. policy rate persist,” Mr. Kganyago said. Higher rates can attract investors seeking strong returns to an economy.
“We need to remind offshore markets that we are willing to tackle inflation, that we are willing to make a hard decision in South Africa,” Citi Global Markets Inc. economist Gina Schoeman said last week.
But since Mr. Kganyago succeeded former Governor Gill Marcus in November, he hadn’t been able to raise the bank’s key rate above its previous level of 5.75% because inflation and growth had both slowed. The economy grew just 1.3% in the first quarter, and the central bank said Thursday that it expects second-quarter growth to also come in around that level.
“[Mr.] Kganyago has clearly decided it is time to take action with the rand weakening and prices rising,” said Dennis de Jong, managing director at online broker UFX.com. “Inflation is on the rise and we’ll have to wait and see if the change in borrowing rates has the desired effect—policy makers will be holding their breath.”
– The Wall Street Journal
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