Banks hike interest rates on MPC announcement

JANUARY 29, 2016

First National Bank (FNB) has become the first bank to increase its prime lending rate following the South African Reserve Bank's (Sarb's) announcement on Thursday that it has decided to hike interest rates by 50 basis points to 6.75%.

FNB said in a statement on Thursday that it will raise its prime lending rate by 0.50%, taking the rate from 9.75% to 10.25%. The new rate is effective on all prime-linked loans from Friday January 29 2016, the bank said.

“We should all welcome the bold step taken by the Sarb earlier today. While the hike is painful, the severe instability we have experienced in recent weeks had to be addressed as the effects of an unstable currency and rising prices will hurt all consumers,” said FNB CEO Jacques Celliers.

“The rate hike is a firm move to restrain inflation without placing constraints on the economy, but the full effect of the today’s hike will only be felt in coming months and we urge consumers to take a careful review of their budgets as we go into 2016," added Celliers, warning that further rate hikes could follow.

In his commentary on the rate hike announcment, FNB chief economist Sizwe Nxedlana said that despite the weak growth backdrop, the Reserve Bank raised rates in line with expectations.

"With inflation likely to rise over the course of 2016 and to average more than 6% this year, we expect the Sarb’s hiking cycle to continue. The upward trend in inflation will be driven by a combination of meaningful drought-induced food price increases, coupled with sharp increases in electricity tariffs," said Nxedlana.

He added that higher interest rates are needed to entice foreign investors and compensate them for the additional country risk they face in the light of the deterioration of South Africa’s sovereign credibility.

"That we are now perceived as a riskier investment destination is reflected in the sharp increase in government borrowing costs since early December. Failure by the Sarb to react to this with higher interest rates could threaten even more rand weakness and higher inflation,” said Nxedlana.