Reserve Bank set to continue raising interest rates

APRIL 5, 2016

With South Africa’s rising inflation, the Reserve Bank says it is necessary to raise interest rates.

“Tolerating additional inflation in the short run could require larger interest rate adjustments later, with proportionally greater costs for the economy. Higher inflation would also have its own economic costs by damaging competitiveness, eroding living standards and weakening confidence,” said the Reserve Bank.

In its April Monetary Policy Review, the Reserve Bank said the changes in monetary policy since January 2014 have followed unfavourable developments in the inflation outlook but that the level of the policy rate is still geared to a slow-growth economy.

The central bank said the major constraints on domestic growth are structural, with the result being declining potential growth rates. These problems, said the bank, do not respond directly to monetary policy interventions.

“Nonetheless, with growth continuing to undershoot potential, monetary policy is still providing stimulus to help absorb spare capacity,” said the bank on Monday.

The bank said over the longer run, the country’s growth interests are best served by keeping inflation within the 3% to 6% target range and not by looking to exploit a temporary trade-off between growth and inflation.

The bank noted that the weak rand as well as higher food prices caused deterioration in its inflation forecast.

In January, the bank raised the repo rate by 50 basis points to 6.75%. The bank again raised the repo rate at its second meeting in March by 25 basis points to 7% per annum.

SAnews.gov.za