South Africa Follows Emerging Markets in Raising Key Rate

30 January 2014

The South Africa Reserve Bank unexpectedly increased its benchmark interest rate, following central banks in emerging markets from Turkey to Brazil that tightened monetary policy to bolster their currencies. The Monetary Policy Committee lifted the repurchase rate to 5.5 percent from 5 percent, Governor Gill Marcus told reporters in Pretoria today. It was the first increase since June 2008.

Marcus said the rate increase wasn't aimed at supporting the currency. The rand's decline after she announced the decision was due to heightened "uncertainty" in the market, with traders focusing on the U.S.'s Federal Open Market Committee statement at 2 p.m. in Washington, she said. The statement may give details of a further reduction in the Fed's bond purchasing program that's helped to support inflows into emerging markets.

"If you're trying to compete for the carry trade, you'd have to do a lot more than 50 basis points," Mohammed Nalla, head of strategic research at Nedbank Group Ltd. in Johannesburg, said by phone. "If the Fed continues its tapering, the rand could extend some further."

Inflation accelerated in December for the first time in four months to 5.4 percent. The inflation rate will probably breach the upper end of the target in the second quarter, and average 6.3 percent in 2014, up from a previous estimate of 5.7 percent, Marcus said.

"The risks to the inflation forecast are seen to be significantly on the upside," Marcus said. "Large adjustments to the exchange rate will inevitably impact on inflation, even in conditions of relatively low pass-through such as we have been experiencing."

Marcus said the decision wasn't unanimous, with two of the seven MPC members opting to keep interest rates unchanged. "The MPC is of the view that, notwithstanding this increase in the repo rate, monetary policy remains accommodative," she said. "Further moves in the repo rate will be highly data dependent."

"Our growth risks are still predominantly to the downside," Jana le Roux, an analyst at ETM Analytics, said by phone from Johannesburg. "There is very little to suggest that we will be able to start producing more and that exports will improve, regardless of the weaker rand. The growth issue will get added focus now that the bank hiked rates."

Source: http://www.bloomberg.com/news/2014-01-29/south-africa-follows-emerging-markets-in-raising-benchmark-rate.html