Reserve Bank Repo Rate to 7.00% | Prime at 10.50%
Reserve Bank governor Lesetja Kganyago has
announced on 17th March 2016 a repo rate increase of 25 basis points to 7.00%.
The weak rand has clearly amplified the Monetary Policy Committee’s concern that inflation expectations have increased significantly since their November 2015 meeting.
Despite the adverse impact a rate hike will have on the economy, the MPC felt it had little option but to raise short term interest rates by 0.25%, given its expectation that inflation would remain outside the 6% upper band for the entire forecast period and peak at 7.8%. The MPC has now hiked interest rates by a cumulative 2.00% since January 2014. We anticipate that despite the rate hike a number of variables outside their control could still lead to inflation edging higher than they anticipate.
The 25 basis points rise in interest rates means that most South Africans will have to spend more money on mortgage payments and rent as well as hire purchase installments leaving them in a poor position to deal with the expected rise in food prices.
The quarter percent increase may seem small but it will have far-reaching effects on both business and wage-earners. We will also have to deal with a possible further increase in electricity tariffs and tax increases in the new budget. The drought had also made it necessary to import basic foods such as grain and will now to have to pay for it with rands that have depreciated by about 25% over the last few months.
The increased interest rates should be seen
as part of a downward spiral in economic activity and, as the cost of living rises,
business should prepare for new and probably unaffordable wage demands later
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