South African Central Bank raises its interest rate by 75 basis points

By: Chime Amara

In a bid to checkmate the rising rate of inflation bedeviling the South African economy, the Central Bank of South embarked on an aggressive interest rate hike for the Rand last week's Thursday, raising its interest rate by 75 basis points, marking the highest rate increase in twenty years.

The recent interest rate hike for the Rand has pushed the interest rate from 4.75% to 5.50%.

The South African monetary policy committee was forced to take this bold step a day after the South African statistics agency announced that the annual consumer inflation rate had risen to 7.4% in June marking the highest rate ever since 2009.

The major cause of the inflation within the country came from the high cost of food and energy (fuel) which rose to a 13-year high at 7.4% in June. This has been caused by the ongoing wars between Russia and Ukraine, whose blockades have imparted food and oil prices across the globe.

The committee announced that the target of the Central Bank is to bring down its interest rate to the benchmark of 6% as they anticipate the economy to grow for the rest of the year by at least 2%, marking a 0.3% increase from the forecast of 1.7% in May. This is considerably low compared to the 4.9% growth the country had registered in 2021. Following this forecast, the country's economic growth will be expected to slow down to 1.3% in 2023, and but expected to jump higher to 1.5% in 2024. Further, the committee announced that their forecast for inflation for this year is 6.5%.

In an official statement from the committee, they disclosed that: “this policy aimed to stabilize inflation expectations more firmly around the midpoint of the target band and to increase the confidence of hitting the inflation target in 2024,”

Analysts believe that the country's policymakers seem to have emulated the US FOMC which had embarked on a similar aggressive interest rate hike for the US dollar during their session in June. The country needed to bring the Rand at par with the US dollar and other countries' currencies that have consistently hiked their interest rates in the past months due to rising inflation.

Hiking the interest rate at this point is good for the Rand at this point as it will help to create more value for the Rand, causing investors to refrain from unrestrained borrowing.