South Africa hikes interest rates to 5.5%
January 30, 2014, 5:22 am

Governor Marcus said, “the hike is not intended to support the rand.” [AP]

South Africa’s Reserve Bank governor Gill Marcus on Wednesday said an increase of a 50 basis point interest rate hike to 5.5 per cent was done to ensure inflation remains under control.

A day before South Africa’s announcement, the Indian Central Bank Governor Raghuram Rajan had raised the key policy rate by 0.25 per cent to 8 per cent, also citing inflationary pressures.

Analysts like Thomas Zulu, an economist with EM Matix, said South Africa had no choice but to follow its peers as “Turkey, which is particularly hard hit by the sell-off, had sharply increased interest rates to protect its currency.”

Both the South African and Indian officials denied the move was to support the currency.

Governor Marcus said, “the hike is not intended to support the rand.”

He was echoed by his Indian counterpart Rajan on Wednesday in New Delhi who said the decision to hike repo rate was not to ward off any possible contagion on the domestic financial markets from troubles in some of the emerging market currencies, but to bring down inflation.

On a question over the Turkish central bank hiking interest rates, Rajan said, “Turkey-like policy action is hypothetical, I won’t venture (out) there.”

The Russian Central Bank has also taken measures to support the rouble.

Stressing that the primary responsibility of the bank is to keep inflation under control, the South African Governor Marcus cited projections of inflationary pressures of over 6 per cent in the second quarter and even higher in the fourth quarter of 6.6 per cent.

It is the first change in the repo rate of Africa’s biggest economy since July 2012 and the first hike in almost six years.

Soon after the announcement, the rand fell to 11.25 against the dollar, a five-year low. The rand has depreciated 10 per cent since December. The Indian rupee slid 20 per cent last year to a record low in August.

The rand’s depreciation is being worsened by mining strikes.

TBP and Agencies