South Africa's central bank raises rates, Fed communications will be key

South Africa’s central bank unexpectedly raised rates at Thursday’s policy meeting, in reaction to excessive weakness in the country’s currency, the risk that drought conditions will push food prices higher and ahead of an increase in electricity tariffs.

The South African central bank’s repurchase rate, its main policy rate, was bumped up by 25 basis points to 6.25%.

“Although global financial markets have stabilised somewhat since the previous meeting, the outlook for emerging markets in particular remains challenging. The US Fed is likely to raise its policy rate in December, and further volatility in financial markets can be expected in the lead-up to this,” the monetary authority said in a statement posted to its website.

“The Chinese economy shows signs of stabilising, aided by policy stimulus, but the medium-term outlook remains a concern,” it added.

US Fed communications key

Given that a rate hike by the Fed was now to be expected in December, the US central bank’s communications would be key to limiting volatility and so-called ‘overshooting’ in exchange rates before and after the Fed's announcement.

Food prices had surprised to the downside recently, but the persistence of the drought had led to downward revisions to the domestic maize crop estimate.

The first signs of those pressures were evident in the country’s producer prices, the central bank said.

In part due to those upside price risks, the South African central bank revised its medium-term inflation forecasts higher. Consumer price inflation was now seen averaging 4.6% in 2015, 6.0% in 2016 and 5.8% in 2017.

Lower commodity prices had a negative impact on Sub-Saharan Africa, with further softness a risk for South Africa’s own exports to the region, according to policy-makers in Pretoria.

“Although the inflation forecast is relatively unchanged since the previous meeting, the upside risks to the inflation outlook are more pronounced.”