Africa Economy: Mixed reactions to S. Africa repo rate rise

Analysts on Thursday expressed mixed reactions to the South African central bank's decision to raise the repo rate to 6.0 percent.

"A repo rate hike on its own wouldn't have been impactful, but consumers are being squeezed by other prices going up too, such as food, electricity and petrol," said Ian Wason, CEO of Australia-based debt management company, Debt Busters.

"To make ends meet many South Africans borrow money through personal loans, micro-loans, payday loans and credit cards to tide them over and with the latest hike in the repo rate credit is bound to get more expensive," he added.

The South African Reserve Bank (SARB) on Thursday decided to increase the repurchase rate by 25 basis points to 6.0 percent per annum with effect starting from July 24.

Taking into consideration financial situations at home and abroad, the SARB's Monetary Policy Committee has decided to continue on its path of gradual policy normalization, said Lesetja Kganyago, SARB Governor.

The expected inflation trajectory implies that the real repurchase rate remains low and possibly still slightly negative at times, and below its longer term average, Kganyago said.

"The monetary policy stance therefore remains supportive of the domestic economy. 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," he said.

"The rise was in anticipation of the commencement of a tightening cycle in the United States which could present a significant risk to inflation due to a weaker rand.

"Our approach is not because the US is moving therefore we have to move; our attitude is when the US moves what are the implication for the economic outlook for SA and we respond to that," Kganyago added.

The bank hiked the repurchase rate as expected, as it wrestles with a slow economy and the weaker rand, and inflation.

"The rand remains a significant risk factor to the inflation outlook... Given the vulnerability of the rand and long bond yields to possible US interest rate increases as well as a deterioration in South Africa's terms of trade," Kganyago said.

In response to the decision, Gary Palmer, CEO of Cape Town-based private lending company, Paragon Lending Solutions, said banks are now more than ever before likely to continue to implement stricter lending regulations.

"An interest rate hike has been on the cards for a long time, especially with inflation increasing fueled by petrol and food price hikes and the devaluing of the rand, which may reduce business confidence further. As such, all indications are that consumers will battle with the price hikes and consequently default on loan payments and lead to banks tightening their lending restrictions once again," he said in a web poster.

Wandile Sihlobo, an economist with South Africa's grain producing service provider, Grain SA, expected that the fuel price could decline further if the rand remained at around R12 to the U.S. dollar and Brent crude oil would continue to trade below 60 dollars a barrel.

But Isaac Matshego, an economist at Nedbank, said the bank was walking on a tight rope.

"We believe the Reserve Bank was faced the policy dilemma of elevated inflationary pressures and weak growth for the first half of next year," said Matshego.

The SARB left the repo rate unchanged in May but signalled that rising oil prices, above inflation wage settlements and a softening currency would make holding the rate indefinitely difficult.

Before the announcement of the rate, the volatile rand toot a knock against major currencies, dropping 0.12 percent to 12.4250 against the dollar.

The rand's weakness is in line with what is happening to other emerging market currencies, although its depreciation is being worsened by worsening power blackouts.

Some emerging markets are raising their interest rates to combat inflation, but India announced a 25 basis point cut to 7.25 percent in June. Enditem