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South Africa – A sign of things to come?

The monetary policy committee in South Africa raised rates by 0.25% last week amid fears of the coming US Fed rate rise in December.  This has happened even though growth is expected to be about 1.5% next year and with weak Chinese demand also impacting prospects.

The currency has depreciated quite a bit against the US Dollar, but the real fear is that after the US Fed raises rates, it will depreciate even more stroking inflation.

This move also falls in line with what happened in Chile and Columbia in our recent Central Bank Index™ November report.  Both countries raised rates under similar circumstances with Columbia raising 0.5% versus market expectations of 0.25%.

In short, the South African Monetary Policy Committee did this in a political climate (election year) and against a backdrop of weak growth.

This now makes three central banks (South Africa, Chile and Columbia) that have raised rates to counter the expected further depreciation in their currencies due to the probable US FED December rate hike.

Thus one of the key things to watch in December is the reaction of Emerging Market currencies.  If depreciation is greater than expectations of the Central Banks, then expect some time of move to counter this since inflation worries will pick up in these countries.

The 19th of November MPC minutes reveal the following concerns:

  1. Big risk is the further depreciation of the Rand.
  2. Potential increase in food prices stroking inflation further.
  3. Week domestic economic growth.
  4. Inflation expected to rise to around 6% in both 2015 and 2016.
  5. Chinese economy shows signs of stability versus previous period.