Main interest rate raised to 6.25% in bid to escape fallout from expected U.S. Federal Reserve rate rise.
PRETORIA, South Africa—South Africa’s central bank raised interest rates on Thursday in a bid to protect its battered currency against the fallout from an expected rate increase by the U.S. Federal Reserve next month.
Reserve Bank Governor Lesetja Kganyago said fears that the rand currency might fall even further, pushing up inflation, now outweighed the concern for South Africa’s chronically weak economy that had prevented rate increases in the past.
“Will the move by the Fed affect us? Of course it will,” Mr. Kganyago told reporters, after raising South Africa’s main interest rate 25 basis points to 6.25%.
Four rate increases over the past two years haven’t stopped the rand from shedding more than a third of its value against the U.S. dollar. If the Fed raises interest rates next month for the first time in years, economists say relatively risky assets like South Africa’s bonds and currency might look even less attractive.
Indeed, as investors have pulled more than $1 trillion out of emerging markets, partly in anticipation of that Fed rate increase, South Africa has looked particularly vulnerable.
Africa’s most developed economy will expand just 1.4% this year, the bank said on Thursday, down from 1.5% last year. That is not even a third of the rate officials say they would need to dent an effective unemployment rate of about a third of the workforce. More than half of South Africans under 35 years old are out of a job.
Slower growth in China, South Africa’s top trade partner, have hurt demand for its iron, gold and platinum. But far more damaging to the economy have been a series of domestic stumbles, from widespread strikes to a failing electrical grid.
Last month, students occupied campuses across the country and marched on PresidentJacob Zuma’s offices here to protest what they said was his failure to build the prosperous, post-racial society his African National Congress party promised at the end of apartheid in 1994.
Some economists said Thursday’s rate increase risked dragging growth down even further.
“A rising interest rate cycle will exact a price in economic growth and employment,” saidRaymond Parsons, an economist at South Africa’s North-West University. “Even a small rise in borrowing costs at this stage will have a negative impact on already low levels consumer.”
Mr. Kganyago acknowledged South Africa’s grim economic trajectory. He said, however, that the modest rate increase wasn’t as much of a threat to growth as deeper structural issues like the contentious relationship between government and organized labor.
He also acknowledged there was no guarantee the hike would boost the rand, which fell to record lows of beyond 14 to the dollar this month. Asked to predict the rand’s trajectory, he exercised his flair for elaborate metaphor to make the point that you can only know where a currency’s value stands, not where it is headed.
– The Wall Street Journal
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