South Africa prepares for increasing interest rates

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South African Reserve Bank Governor confirmed that interest rates will be going up in 2015 given the current inflation outlook.

Governor Lesetja Kganyago told CNBC Africa at the World Economic Forum (WEF) on Africa that the Reserve Bank has made it abundantly clear that the risks to the inflation outlook are on the upside.

“We started the interest rate tightening cycle last year in January, we did a total of 75 basis points.”

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According to Kganyago, the risk to the inflation outlook is driven, firstly, by the convergence of potential growth to actual growth, so the amount of slack is closing which poses a risk.

Secondly, the electricity price increases in the forecast and thirdly the affcet that the currency has on generalised prices. “It is the combination of all those factors and how they interact with each other that would impact on the inflation outlook,” he said.

Kganyago also cites the decline in the oil price as posing a risk at the beginning of the year which led the Reserve Bank to pressing the ‘pause button’.

The oil price recovery in March and weakening of the currency led to a revision of the inflation forecast at 3.8, Kganyago now thinks it will average close to 4.5. “We said now we have to take the finger off the pause button.”

When this increase will kick in is still a mystery as Kganyago said it will depend on the deliberations and how the data looks like at the July meeting.

“Monetary policy has been accommodative since 2009. As a matter of fact, based on projected inflation, we expect inflation next year to average at 6.1 per cent, we expect it to peak at 6.8 per cent in the first quarter of next year,” revealed Kganyago.

“In the current environment we should not be talking about rand weakness, we should be talking about dollar strength. Because when you look at the rand against the Euro, it has strengthened or remained stable.There is no need to be fixated on one currency being the dollar against the rand. Our experience in trying to defend the currency has been a spectacular failure.”

He said the idea that central banks could control the exchange rate needed to be done away with. However, he reassured that of the ten fastest growing economies in the world, six of them are in Africa.

“Africa does not need kick-starting, its merely a question of: Can Africa continue to sustain the growth rates we have seen so far?”

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