Interest Rate raised by 0.25%

South African Reserve Bank (SARB) governor Gill Marcus announced yesterday afternoon the long-dreaded repo rate hike by 25 basis points (0.25%), following a three-day meeting with the monetary policy committee (MPC).

“The MPC has decided to continue on its gradual normalisation path and raise the repurchase rate by 25 basis points to 5.75% per annum, effective from Friday 18 July,” said Marcus. The last time SARB adjusted the repurchase rate by less than 50 basis points was in October 2000. Marcus stated that South Africa’s economic growth outlook deteriorated and urged the implementation of reforms in order to boost growth. “We would like to reiterate that monetary policy should not be seen as the growth engine of the economy. The sources of the below par growth performance are largely outside the realms of monetary policy.”, she said.

With the rate hike coming into effect the Commercial Banks hiked their prime lending rates to 9.25% today. “The change in the interest rate cycle should indicate to consumers that lending in general will be costing more,” Standard Bank personal banking head Sugendhree Reddy said in a statement. “Consumers are urged to continue reviewing their income and debt portfolios and adjusting their consumption patterns.” First National Bank CEO Jacques Celliers said consumers were already heeding calls to reduce borrowing and the bank had seen a decline in consumer credit demand. “The SA Reserve Bank has ‘feathered’ rates higher this year to reduce the impact on consumers. However, we believe this current rising cycle has yet to run its full course and we still see further hikes in coming months,” he said. “Certain retail loans can be consolidated at lower rates. At the same time, this is good news for investors seeking interest income.”

FNB’s chief economist Sizwe Nxedlana said the bank expected SARB to raise interest rates further. He said the country had a large current account deficit and there is insufficient saving to meet investment demand. The interest rate hike posed a threat to consumers already struggling with debt, DebtBusters CEO Ian Watson said. He said the current financial environment continued to be difficult.

“Consumers already struggling with debt need to prepare themselves for greater challenges as the interest rate hike will have a severe impact on their financial situation,” said Watson. SARB governor Gill Marcus said the bank’s monetary policy committee (MPC) had decided to continue its “gradual normalisation path” and raise the rates. “The monetary policy stance remains supportive of the domestic economy, and, as before, any future moves will be gradual and highly data dependent.” She said the year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas measured 6.6% in May, up from six percent and 6.1% in March and April 2014 respectively.

The economic growth outlook has deteriorated since the last monetary policy committee meeting against the backdrop of the protracted strike action in the mining and manufacturing sectors, Marcus said.

This is just the beginning ….

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