Repo rate rises to 5.5%

2014-01-29 15:58

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The SA Reserve Bank (Sarb) increased the repurchase rate by 50 basis points, citing the weak rand as the main reason for the increase.

The repo rate is now 5.5% and the prime lending rate is at 9%. This is the first increase since June 2008.

Sarb Governor Gill Marcus said the central bank’s monetary policy committee had carefully considered the economic challenges facing South Africa and the appropriate policy response.

“On the one hand, inflation forecasts indicate the possibility of being out of the target range for an extended period, largely due to the impact of the depreciating currency. The risks to the inflation forecast are seen to be significantly on the upside,” said Marcus.

She said the expectation of tapering by the US Federal Reserve since May 2013 resulted in significant outflows from emerging economies’ domestic bond and equity markets, which put pressure on exchange rates, particularly in those countries with sizeable current-account deficits.

Marcus said the recent rand weakness is part of a general emerging market phenomenon and has been reinforced by “declining terms of trade, ongoing labour disputes and higher than expected current account deficit”.

She said there were some positives with the weak rand, especially with regards to exports, but warned that higher wage and other input costs could erode possible gains that could be made by an increase in exports.

Annabel Bishop, Investec chief economist, said the South African economy was weak with over-indebted individuals. She said interest rate hikes would likely lead to a rise in defaulting debtors – from 60% to 70%.

In addition, Bishop said the retail sector was already experiencing a drop in sales, which would be further exacerbated by higher interest rates.

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