The rand has fallen over 2% – hitting a new record low of close to 19-77 to the dollar after the Reserve Bank hiked the repo rate by 50 basis points. The prime lending rate has now increased to 11.75%.
The local unit was also on the back-foot due to a stronger US-dollar linked to positive GDP forecasts for the US economy. Some economists expect the local currency to remain under pressure and for the reserve to pause any further interest rate increases. Izak Odendaal is an Investment Strategist from Old Mutual.
“The Reserve Bank’s 50 basis points increase was expected by economists but it does look like the currency market was hoping for more because the rand is down more than 2 percent against the dollar and euro following the MPC decision and I think quite simply the reason is that the Reserve Bank is now talking about its policy being in restrictive territory. In other words that limits the scope for any further increases and whereas the currency markets are saying that we need more.”
Constant interest rate increases not surprising: Dr Lumkile Mondi:
Economist Sanisha Packirisamy says the rates hike should be viewed within the context of how inflation affects low income earners.
“We need to sort of draw the distinction between the effects of higher inflation on your low income earners in South Africa- and of course someone is getting hit by higher interest rates, and that is currently your upper middle, and upper incomer earner- that seems to be more exposed to anything that is linked to the prime rate of interest. So, those consumers that have a car loan outstanding, or a home loan outstanding. However, the Reserve Bank has in the past indicated that there is a disproportional effect coming from inflation, and with your lower income earners really looking for more than 40% of their baskets spend going towards food and you know that food prices have been escalating more than 14%.”
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