South Africa announces biggest interest rate rise in nearly 20 years

2022-07-22 09:54:42

international

Online desk


South Africa’s central bank has unveiled the biggest increase in interest rates for nearly 20 years in the continent’s most industrial economy, joining the wave of policymakers trying to tackle surging global inflation. The South African Reserve Bank raised its main benchmark rate by three-quarters of a percentage point on Thursday, to 5.50 per cent. This was more than expected as the bank warned that aftershocks from the war on Ukraine would be felt on food and fuel prices throughout the year. South African inflation, which was driven by food and fuel prices to a 13-year high of 7.4 per cent in June, is likely to remain above a 3 to 6 per cent target band until the second quarter of next year, the bank said. Economists had mostly expected the bank to raise rates by half a percentage point, but this was favoured by only one of five monetary policy committee members. One member favoured a full percentage point increase. “The aim of policy is to stabilise inflation expectations more firmly around the midpoint of the target band and to increase confidence of hitting the inflation target in 2024,” the bank said. The bank’s forecast for inflation this year is 6.5 per cent. “Russia’s war in Ukraine is likely to persist for the rest of this year and may have significant further effects on global prices,” it added. South Africa last raised rates by more than half a percentage point in late 2002. Like their emerging-market peers, South African monetary policymakers are under pressure to stay ahead of the US Federal Reserve, which in June raised rates by the most since 1994. The US central bank is broadly expected to hike rates by a similarly large three-quarters of a percentage point in July, adding to pressure on the currencies of developing nations and therefore vulnerability to imported inflation. The South African rand has fallen by about 6 per cent against the US dollar so far this year. South African rates remain below their level just before the coronavirus pandemic struck in early 2020, but economists now expect the central bank to raise rates to about 6.5 per cent by the end of 2022. Even as the central bank battles higher food and fuel prices, South Africa’s economy is largely stagnant, partly as it buckles under the country’s worst ever rolling blackouts this winter. The economy is forecast to grow by 2 per cent in 2022, but will have been held back by the power cuts in recent months, the bank said. The large hike underlines pressure on the bank “to get ahead of elevated inflation and inflation expectations [and] avoid a significant narrowing of the interest rate differential between South Africa and key trading partners, while also confronting risks to growth,” said Mamello Matikinca-Ngwenya, chief economist at South Africa’s FNB. This month Nigeria, Pakistan, Romania and Hungary have been among central banks that have gone further than South Africa and raised rates by a percentage point or more.