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S.African central bank raises key interest rate to 6.0%

By AFP
South Africa South Africa's central bank has raised rates by 25 basis points to 6.0 percent.  By Stephane de Sakutin AFPFile
JUL 23, 2015 LISTEN
South Africa's central bank has raised rates by 25 basis points to 6.0 percent. By Stephane de Sakutin (AFP/File)

Pretoria (AFP) - South Africa's central bank raised its benchmark interest rate by 25 basis points to 6.0 percent on Thursday ahead of an expected rate rise by the US Federal Reserve later this year.

The Monetary Policy Committee, which is wrestling to balance anaemic growth with a weak rand and rising inflation, raised the repurchase rate for the first time in a year.

"The persistence of forecast inflation at elevated levels and the continued upside risks of the outlook remain a concern of the MPC," said Lesetja Kganyago, governor of the South African Reserve Bank.

"Further reaction to US monetary tightening could cause inflation to diverge even further from target and set in motion an exchange rate-inflation spiral.

"The extent to which US policy tightening is already priced into the exchange rate also remains uncertain."

Africa's most developed nation has been saying for months it would gradually hike rates as it grapples with rising food and electricity cost.

Inflation is projected to breach the bank's upper-level 6.0 percent target range early next year.

"The domestic growth outlook remains subdued, amid continued electricity supply constraints, and weak business and consumer confidence," Kganyago said.

He revised down the bank's forecast for growth to 2.0 percent in 2015 and 2.1 percent in 2016.

"I think people don't give the South African Reserve Bank enough credit for being forward looking," said Peter Attard Montalto, an economist at Nomura.

"It lays down a marker to markets that the South African Reserve Bank is serious about hiking rates if inflation risks result from many factors, including the US Fed," said Montalto, speaking from London.

"I think that provides a degree of insurance."

This rate hike is just the beginning, said Nicky Weimar, a Johannesburg-based economist at Nedbank.

"The rand is going to come under strain next year, when you'll see more of the moves coming from the US," said Weimar, adding the rate rises would make already conservative South African consumers even more careful.

"Certainly we're not seeing evidence of them willing to venture and go out to grab credit purchases or durable goods," said Weimar.

"Caution is the message that South African consumers should take away — try and repay the debt."

Ahead of the decision, economists were generally divided on whether the bank would hold or raise the rate.

Four members of the committee favoured the 25 basis point increase, and two backed an unchanged rate.

A strong batch of US housing data this week reinforced expectations that the Federal Reserve will lift rates soon in a move likely to dampen investment in emerging markets.

Latest figures out on Wednesday showed South African inflation rose slightly to 4.7 percent.

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