South African Reserve Bank Governor Lesetja Kganyago moved to restore stability in the economy and cement his inflation-fighting credentials by taking more aggressive action to counter the effects of a plummeting currency. Policy makers raised the benchmark interest rate by half a percentage point to 6.75% recently, moving away from a gradual approach of tightening in moves of 25 basis points at a time.
Kganyago and Finance Minister Pravin Gordhan have taken on the task of restoring confidence in an economy hit by a series of policy missteps by President Jacob Zuma last year, plunging commodity prices and the risk of credit-rating downgrades to junk. The rand slumped 15% against the dollar since the last Monetary Policy Committee meeting, threatening the central bank’s 3% to 6% target.
The rand’s slide last year was worsened in December when Zuma unexpectedly fired Finance Minister Nhlanhla Nene and replaced him with little-known lawmaker David van Rooyen. A market backlash that saw the rand plunge to a record low forced Zuma to reverse his decision four days later and appoint Gordhan to a post he had occupied from 2009 to 2014.
The bank “did what was expected and stuck to their mandate, which is to target inflation,” Lullu Krugel, an economist at KPMG LLP in Johannesburg, said by phone. “It could send a statement that they’ve stuck to their guns and are doing what they need to do.”
The rand gained 0.5% against the dollar in Johannesburg after rallying 1.5% on prior. Yields on the government’s rand-denominated bonds due December 2026 fell 11 basis points to 9.37%. Policy makers have been in a bind since last year as inflation pressures mounted and economic growth slowed. While lower oil prices have helped to limit gains, food prices are rising as the worst drought in more than a century boosts costs. The bank expects inflation, which accelerated to 5.2% in December, to average 6.8 percent this year and remains above its target band until 2017.
The bank lowered its growth forecast for this year to 0.9% from 1.5%. The risk of a recession is mounting; with a 45% chance that gross domestic product (GDP) will contract for two consecutive quarters, according to the median estimate of nine economists surveyed by Bloomberg.