FNB welcomes Reserve Bank's raise in repo rate

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"We should all welcome the bold step taken by the Reserve Bank. While the hike is painful, the severe instability we have experienced in recent weeks had to be addressed as the effects of an unstable currency and rising prices will hurt all consumers," says FNB CEO, Jacques Celliers.

"The rate hike is a firm move to restrain inflation without placing constraints on the economy, but the full effect of the today's hike will only be felt in coming months and we urge consumers to take a careful review of their budgets as we go into 2016. There may be further rate hikes during the year," added Celliers.

Inflation likely to rise

"Despite the weak growth backdrop, the Reserve Bank raised rates in line with expectations. With inflation likely to rise over the course of 2016 and to average more than 6% this year, we expect the Reserve Bank's hiking cycle to continue. The upward trend in inflation will be driven by a combination of meaningful drought-induced food price increases, coupled with sharp increases in electricity tariffs," says Sizwe Nxedlana, chief economist at FNB.

"A more pronounced currency pass-through poses upside risk to this relatively negative inflation projection. Furthermore, given the deterioration in South Africa's sovereign credibility we need higher interest rates to entice foreign investors and compensate them for the additional country risk they face.

"That we are now perceived as a riskier investment destination is reflected in the sharp increase in government borrowing costs since early December. Failure by the Reserve Bank to react to this with higher interest rates could threaten even more rand weakness and higher inflation."