Sarb announces interest rate hike

The move takes the repo rate to 5,5 percent and the prime lending rate to nine percent.

FILE: SA Reserve Bank Governor Gill Marcus is seen at a Business Unity SA and World Bankgender economic empowerment workshop in Johannesburg, 15 March 2011. Picture: Sapa.

JOHANNESBURG - Interest rates will rise by 50 basis points, South African Reserve Bank (Sarb) Governor Gill Marcus announced on Wednesday.

This takes the repo rate to 5,5 percent and the prime lending rate to nine percent.

Announcing the Monetary Policy Committee (MPC) decision in Pretoria this afternoon, Marcus said South Africa's economic outlook remained subdued.

This was largely on the back of poor business confidence.

"The primary responsibility of the bank is to keep inflation under control and ensure that inflation expectations remain well anchored. The depreciation experienced so far could improve our international competitiveness, provided that it is not eroded through higher wage and other input prices," she said.

"In the light of these circumstances and taking account of policy trade-offs, the MPC has decided to increase the repurchase rate."

Marcus says the inflation rate looks particularly worrying at this stage.

"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."

With the inflation target between three and six percent, and the current Consumer Price Index hovering at 5.4 percent, Marcus is warning that a rate of over six percent is increasingly likely.

The exchange rate briefly improved after Marcus's announcement, with the rand firming by two percent against the dollar, but has since weakened even further.

Many economists will be surprised by the rate hike, with most having expected no change this time around.

All those polled by Bloomberg predicted the MPC would keep the rate at its historical low, where it had been since July 2012.

However, many were hoping their forecasts would be disproved, calling for a hike to offset the deficits and rein in inflation.

At the same time, those economists warned the move could cause a recession, but said this may be a better path in the long term.

Sarb's announcement comes just hours ahead of the US Federal Reserve's own announcement, where it is expected to reveal further tapering of its quantitative easing programme.

The Fed's stimulus package has helped increase capital flow globally and any cuts are expected to hit emerging markets such as South Africa.