South African Reserve Bank raises key interest rate

Thursday 17 July 2014 16.55
South African Reserve Bank said economic growth is expected to slow
South African Reserve Bank said economic growth is expected to slow

The South African Reserve Bank raised its key interest rate and slashed its 2014 growth forecast again, citing industrial strikes and high inflation.

The central bank raised its repo rate by 0.25 percentage points to 5.75%, though it also said that economic growth was now expected to slow to 1.7%, down from a previous estimate of 2.1%.

The bank "remains concerned about weak growth, widening output gap and the negative employment outlook," governor Gill Marcus said in reference to a 25.2% unemployment rate.

The bank "faces an increasingly difficult dilemma of rising inflation and slowing growth," Ms Marcus added.

A weak currency and rising food prices further complicated the rate decision.

The inflation outlook worsened since the bank's last meeting in May. Measured at 6.6% two months ago, the rate is expected to stay above a 6.0% target until next year.

Meanwhile a series of wage strikes has severely affected economic growth.

Key car manufacturers have shut down their South African plants amid a third week of strikes by about 200,000 workers of the country's largest labour group, the National Union of Metalworkers of South Africa (NUMSA).

The stoppages came after a five-month-long platinum mining strike ended last month, which  is estimated to have cut overall economic growth by 0.6 percentage points in the first quarter of 2014.

Annual growth has slowed meanwhile from 3.6% in 2011 to 1.9 percent last year.

The bank lowered growth expectations from 3.1% to 2.9% for next year as well.

The figures are far below those of the entire sub-Sahara Africa region, where the IMF expects business activity to grow by 5.4% in 2014 and 5.5% in 2015.

Ms Marcus warned the strikes could spread like a virus in South Africa, leading to a wage-price spiral.  

It was "imperative" that some of the focus on mining wages be shifted to "excessive salaries and bonuses" of mine managers and executives, the governor said.

Nedbank chief economist Dennis Dykes called the bank's decision to raise the repo rate "a bit of a mistake".

"Given the economic weakness and that inflation is cost-pushed at this point, it really in the end is counter-productive," Mr Dykes said.

Earlier this month Moody's warned that the current metalworkers strike would damage the country's "already deteriorating reputation among investors."