South Africa Raises Rates To Protect Currency, Pre-Empt Fed

Avatar
Written by Dana Sanchez

South Africa’s central bank raised interest rates 25 basis points to 6.25 percent Thursday in an effort to protect the rand from anticipated fallout of a possible rate increase in December by the U.S. Federal Reserve, WallStreetJournal reports.

Some economists said the rate increase risks dragging down South Africa’s growth even more.

Fears that the falling rand might push up inflation may have prevented rate increases in the past, said Lesetja Kganyago, reserve bank governor.

The effects of a U.S. Fed rate hike are likely to reverberate throughout the global economy, FinancialTimes reported.

Most Fed members agree December might be a good time to raise rates as long as U.S. economic data continues to improve and there are no “unanticipated shocks,” according to the U.S. Federal Reserve minutes from their October meeting.

“Will the move by the Fed affect us? Of course it will,” Kganyago told reporters, WSJ reported.

South Africa has had four rate increases during the past two years when the rand lost more than a third of its value against the U.S. dollar, WSJ reports. If the Fed raises interest rates in December for the first time in years, economists say relatively risky assets like South Africa’s currency and bonds might look even less attractive.

Raising the repo rate is in line with the South African Reserve Bank’s mandate of focusing on inflation targeting, FinancialTimes reports.

South Africa, one of the most traded emerging markets, has looked particularly vulnerable as investors pulled more than $1 trillion out of emerging markets, partly in anticipation of the Fed rate increase, FT and WSJ reported.

The rand depreciated sharply against the U.S. dollar this year with an all-time low as it traded below 14 rand to the dollar.

Slower growth in China, South Africa’s top trade partner, hurt demand for gold, platinum and iron. But domestic troubles have been far more damaging to the economy such as strikes and a failing electrical grid, WSJ reported.

In October, university students across South Africa protested what they said was President Jacob Zuma’s failure to build the prosperous post-racial society his African National Congress party promised at the end of apartheid in 1994.

The South African economy is expected to grow 1.4 percent this year, the bank said. It grew 1.5 percent in 2014. Officials say it needs at least 4.5 percent growth to improve the unemployment rate. More than half of South Africans under 35 years old are unemployed, according to WSJ.

“A rising interest rate cycle will exact a price in economic growth and employment,” said Raymond Parsons, an economist at South Africa’s North-West University. “Even a small rise in borrowing costs at this stage will have a negative impact.”

Kganyago said that the modest rate increase wasn’t as much of a threat to growth as issues like the tense relationship between government and organized labor.

A third-quarter rebound in South African manufacturing eased concerns that the economy could slip into a recession, but mining, hit by falling commodity prices, contracted 9.9 percent in the third quarter, and agriculture is suffering from the worst drought in decades, according to FinancialTimes.