Public Finance Analysis: South Africa Lifted its Key Interest Rates in Order to Curb Inflation…

South Africa’s Reserve Bank lifted interest rates by 25 basis points to 6.00 percent on Thursday, a decision viewed as a borderline call, with the bank saying it remained in a hiking cycle while upside risks to inflation remained in place.

The bank last raised benchmark lending rates in July 2014, but since then Africa’s most advanced economy has been constrained by chronic power shortages along with other structural obstacles.

South Africa is one of the world’s most liquid and traded emerging markets. But the pace of economic growth is far below the level the nation needs to tackle rampant unemployment and poverty.

Monetary authorities have been grappling with the policy dilemma of persistent inflationary pressures, set against a sustained period of anaemic economic activity, for more than two years.

Against this backdrop, the government has been struggling to narrow current-account and budget deficits. The volatile rand is also vulnerable to global factors, particularly any changes to US monetary policy such as the Federal Reserve raising rates. The rand has depreciated by more than 6 per cent against the greenback this year.

“Economic growth remains subdued, constrained by electricity supply disruptions and low business and consumer confidence, and the risks to the outlook remain on the downside,” said Mr Kganyago.

Causes

  1. Deteriorated outlook due to persistent power crisis that is causing daily power outages in the country.
  2. Labor unrests.
  3. Weak consumer confidence.
  4. Weak investor confidence.

Targets

  1. The central bank usually seeks to keep inflation between 3% and 6%.
  2. Currently targeting 2015 average of 5%, up from 4.9%.

Reasons for rate increase

  1. He said it should be remembered that the main reason for controlling inflation is to foster employment
  2. Foster economic growth and investment in the medium to long-run.

The bank said the pace of nominal wage growth remained high and contributed to persistently high inflation.

Government recently backed down from its plan to offer public sector unions a lower pay rise, acceding to demands for an above inflation rise of 7 percent and CPI plus one percent increase for 2016/17 and 2017/18, adding further pressure to the inflation outlook.

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About Anang Tawiah

About the author :: Anang Tawiah is a New York City based Management Consultant specializing in Investment Risk and Technology Strategy. He continues to guide many Blue chip companies and Governments as a Business and Technology Consultant. Please direct all follow up questions, concerns, request for speaking engagements and presentations regarding my articles and research to my Facebook Page listed below. You can read more of his analysis or reach him for further professional consultations and or guidance at: // Email: anang@labaddi.com // Follow me on Wordpress: www.anangtawiah.com // Follow me on Facebook: www.facebook.com/AnangTawiah

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