The South African money market cognoscenti--asset managers, traders, an assortment of economists and others of the regional financial motley crew--were caught on the wrong foot in February when the South African Reserve Bank (SARB) announced a half percent rise in the repo rate.
The move by the Bank's monetary policy committee (MPG) adjusted the key re-purchase rate to 5.5% and increased the prime lending rate to 9%. Banks are allowed to add an additional 3.5% to the repo rate. The move, explained the Bank's governor, Gill Marcus, was a measure to prop up the steadily weakening rand currency and as a counter to "external" influences that were dragging the rand down.
"Exchange rate pressures are expected to intensify as markets adjust to the new pattern of global capital flows," said Marcus. "The primary responsibility of the Bank is to keep inflation under control and ensure that inflation expectations remain well anchored."
Ms Marcus said the rate decision had not been influenced by Turkey's surprise huge rate hike the previous day and was not aimed at affecting the exchange rate.
If the move was intended to steady the spiralling rand rate, it had the opposite effect and sent the rand crashing even further, on the day plunging from R10.84-$1 to R11.35. There was some recovery, but the damage was done and the rand floundered in the panic of uncertainty.
The real reasons for the sudden interest rate hike, the first in five years, are still a mystery for most. The main reason that would trigger an increase, menacing inflation, was conspicuous by its absence. The Bank has pegged the inflation rate at 3%-6% and it was comfortably within those limits when the decision was taken to arbitrarily raise the rate.
The Central Bank explained this apparent anomaly by saying it expected the inflation rate to reach 6.6% by the end of 2014, but the criteria it offered for this assumption was vague and ambiguous.
The retail banks are anxious for higher rates after years of languishing at a low (for South Africa) 5%. Peculiar to South Africa, banks are permitted by the Reserve Bank to load the repo rate by an additional 3 1/2%, so the higher the interest rate the better it is for the banks. It is intended as a buffer against debt risk and as other lending hedges. It's also possible that the government turned the screws to make the rate more interesting to foreign investors and revitalise the flow of capital into South Africa's money markets.
The Reserve Bank...