The Reserve Bank’s Monetary Policy Committee says that given the deterioration in the inflation outlook, it has decided to increase the repurchase rate by 50 basis points to 6.75% per annum.
This means the prime lending rate will now be 10.25%.
Lending rates have risen by a cumulative 175 basis points since late January 2014.
“The Committee faced the continuing dilemma of a deteriorating inflation environment and a worsening growth outlook,” Reserve Bank governor Lesetja Kganyago said.
He said that growth is expected to average to 1.3% in 2015.
The governor said that the exchange rate of the rand has depreciated considerably since the previous MPC meeting, in response to domestic and external developments.
The impact of the worsening drought on food prices is becoming increasingly evident, the governor said.
Key risk for inflation outlook is not only possibility of further deterioration. Domestic economic outlook remains weak.
He said that the prospects of formal sector employment remains weak while household expenditure is likely to remain constrained.
Jacques Du Toit, Absa Senior Economist said that commercial banks are expected to raise their prime lending and variable mortgage interest rates by the same magnitude to 10.25% per annum.
“The MPC’s decision to increase the repo rate this time by a larger margin after announcing a 25 basis points rate hike in November, was taken against the background of serious concerns regarding factors such as the sharply weaker rand exchange since late last year, expected rising food prices in the near term due to the negative impact of the severe drought on agricultural production and the possibility of above-inflation electricity price hikes this year.
“These and other factors will create further inflationary pressures, with the forecast for the headline inflation rate to average above the level of 6% in 2016.”
As a result, Du Toit said that interest rates are projected to rise further during the course of the year, which will lead to higher debt repayments over a wide front and contributing to increased financial pressure on consumers.
“In view of these developments and expectations, banks will continue to closely monitor economic and consumer-related trends that may impact their risk appetite and lending criteria.”