South Africa Raises Policy Rate by 75 Basis Points

On Thursday, South African Reserve Bank Governor Lesetja Kganyago said that the Monetary Policy Committee (MPC) had decided to raise the policy rate by 75 basis points to 6.25 percent per annum with effect from Friday.

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This means the current repurchase rate of 5.5 percent will now increase to 6.25 percent and the prime lending rate to 9.75 percent. The bank has raised the repurchase rate for the sixth successive time since November last year. Three members of the committee favored the announced increase while two members favored a 100 basis point hike.

"The revised path for the purchase rate supports credit demand in the short term while raising interest rates to a level more consistent with the current assessment of inflation risks," Kganyago said.

The aim of the policy is to "anchor inflation" expectations more firmly in the middle of the target band and to boost confidence that the inflation target will be achieved in 2024.

The country should aim for "prudent" government debt and a stable energy supply to improve the effectiveness of the monetary policy. "In this uncertain environment, monetary policy decisions will continue to be data dependent and responsive to the balance of risks to the outlook," said the governor.

The South African Reserve Bank's inflation target is between 3 and 6 percent. Inflation has risen rapidly since the beginning of the year, mainly due to increases in food, gas and other living costs. This latest increase, which would mean higher repayments for consumers with loans and mortgages, would erode consumers' disposable income.

Economist Dawie Roodt said that raising the repo rate would have dire consequences for consumers' finances and the economy. "It means consumers will have less money to spend, which will affect the economy. The economy might contract in the third quarter," he said.