South African Reserve Bank (SARB) has announced raising interest rates for the second time in two months, on Thursday. The South African monetary authority has also slashed its growth forecast amid a deepening sense of economic crisis. These steps have been adopted in the midst of battle to counter inflationary pressures caused by a dramatic fall in the rand.
SARB has increased its benchmark rate by 50 basis points to 6.75%. The decision appears just weeks after the rand plunged to all time lows. President Jacob Zuma has been blamed for unsettling markets through changing finance ministers twice and appointing a third during last month, in less than a week's interval, reports Financial Times.
Following the central bank's trait, First National Bank (FNB) appears to be the first bank to increase prime lending rates. FNB has hike the key lending rate by a similar margin to 10.25%. The new rate takes effect from Friday. Despite the weak growth backdrop, the Reserve Bank's role in hiking rates appears in line with expectations, reports AllAfrica quoting Sizwe Nxedlana, chief economist for FNB.
Country's biggest banks are expected to reduce staff numbers. Beside rising interest rates, slower economy and weakening rand weigh on earnings have been cited as the reason for the prediction related to workforce reduction. Bank employees have been forecast to face lower pay, redeployment or job losses during 2016. Banks are believed to adopt this cost efficient measure, since staff cost is the single largest cost items for this portfolio, reports Bloomberg quoting Neelash Hansjee, bank analyst at Old Mutual PLC, a Cape Town based investment unit. Barclays Africa, Nedbank and Standard Bank have been adopting technologies that may enable them to employ less staff, particularly for administrative functions. All these lenders have been investing in digital products to make those cheaper to bank and interact with customers. The International Monetary Fund (IMF) has downgraded its growth forecast for Africa's most industrialized nation to 0.7% for this year. This will be the lowest growth since recession in 2009. However, the IMF prediction may downgrade South Africa's credit rating to junk status. SARB has cut its growth forecast for 2016 to 0.9%, down from previous estimation of 1.5%, made at the Monetary Policy Committee's last meeting in November. But some economists predict even lower growth fearing further shocks centering the outright recession. South African economy is tumbling with the weaker value of rand. The inflationary pressure has compelled the central bank to decide on interest rate hiking for the second time within a span of weeks. The rate hike forces the commercial banks to increase their lending rate. Rising expenses for the banks due to increase in benchmark rate eventually may cause job cutting. Moreover, slower economic growth may cause downgrading of South Africa's credit rating to junk status.
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