South Africa’s central bank surprised markets on Thursday by raising benchmark lending rates for the second time in 2015, warning that failure to act on inflation risks could worsen the country’s already weak growth.
The bank raised lending rates by 25 basis points to 6.25 percent after increasing them the same amount in July. Markets had bet it would leave rates unchanged while waiting to see the effect of a U.S rate increase widely expected in December.
“Delaying the adjustment further could lead to second-round effects and require an even stronger monetary policy response in the future, with more severe consequences for short-term growth,” Governor Lesetja Kganyago said at the South African Reserve Bank’s (SARB) final policy meeting for 2015.
The bank expects inflation to average 4.6 percent in 2015, compared with a previous forecast of 4.7 percent. But it sees consumer prices breaching the bank’s upper target of 6 percent for two consecutive quarters in 2016 as an ongoing drought pushes up food prices.
“Despite the increase, the MPC still views the monetary policy stance to be accommodative. The continuing challenge is for monetary policy to achieve a fine balance between achieving our core mandate of price stability and not undermining short-term growth unduly,” Kganyago said.
The Bank lowered its forecast for GDP growth for 2015 and 2016, to 1.4 percent and 1.5 percent respectively.
“By acting early, the SARB has put itself in a more comfortable place. Should inflation risks accelerate, its tightening now should be sufficient to deal with the threat,” said chief economist at Standard Charted Razia Khan.
Foreign exchange markets welcomed the rate hike. The South African rand gained more than one percent after the decision. Government-issued bonds also rose.
Not everyone was enthusiastic. The bank had room to keep rates on hold, to alleviate pressure on the economy, Nedbank head of research Mohammed Nalla said. The rate increase risked entrenching recessionary conditions after the continent’s most advanced economy contracted in the second quarter.
“If you look at the SARB’s own inflation forecasts, the entire curve softened marginally,” Nalla said. “… If the hike was intended to potentially stymie second-round effects of a weaker rand, I don’t think 25 basis points does that.”
Members of the bank’s six-member policy committee voted 4 to 2 to raise rates. Kganyago said the committee did not consider a 50-basis-point hike.