Facing a tough dilemma whether to act now or later in a lacklustre growth environment with no demand pressures coupled with uncomfortably high inflation expectations, South Africa’s central bank took a defensive stance and hiked its key repo rate by 25bp to 6.25%, aiming to avoid an “even stronger monetary policy response in the future, with more severe consequences for short-term growth”. Four members of the monetary policy committee (MPC) voted for an increase, while two favoured an unchanged stance, the Reserve Bank of South Africa (SARB) said in a statement.

This is the second 25bp rate hike in South Africa this year. SARB held the repurchase rate, at which it lends rands to private banks at 5.75% for a year until July, after lifting it by a total of 75bp in the first half of 2014 to curb rising inflation and a depreciation of the rand.

In the much dovish statement on November 19, governor Lesetja Kganyago reduced marginally South Africa’s growth outlook by 0.1pp for both 2015 and 2016 to 1.4% and 1.5%, respectively, but warned that while the risks to the outlook were more or less balanced at the previous meeting in September, they are now assessed to be on the downside. Although not expecting the economy to fall into recession (two consecutive quarters of contraction), the governor noted that it remains weak and a somewhat surprising recovery of the manufacturing sector will be largely offset by expected further contractions in mining and agriculture in the third quarter.

SARB’s inflation forecast remained relatively unchanged (an average annual inflation of 4.6% in 2015, 6.0% in 2016 and 5.8% in 2017), but the risks to the forecast have increased, Kganyago said, pointing at a marked depreciation of the rand, worsening drought conditions and their likely impact on food prices, and the possibility of additional electricity tariff adjustments.

“The general approach of the MPC is to attempt to see through exogenous shocks and react to second-round effects. However, shocks of a persistent nature, for example extended periods of currency depreciation or drought, or multi-year increases in electricity prices make it more difficult to disentangle these first and second round effects,” Kganyago said.

He added that despite the increase, the MPC still considers the monetary policy stance accommodative.

“Monetary policy actions will continue to focus on anchoring inflation within the [3%-6%] target range while remaining sensitive, to the extent possible, to the fragile state of the economy,” Kganyago concluded.