The South African Reserve Bank raised its key repo rate by half a percentage point to 8,5% on Thursday, and warned inflation pressures were building in Africa’s biggest economy.
”The monetary policy committee remains concerned about the outlook for inflation going forward and is of the view that the risks to the inflation outlook are still on the upside,” Reserve Bank Governor Tito Mboweni told a televised news conference.
The rand currency fell 0,8% to 7.71 against the dollar after the announcement before retracing marginally, while government bonds firmed.
The hike, in line with expectations, was the third rise of 50 basis points since June, and most analysts expect further increases in interest rates into 2007 as the Reserve Bank tackles rising inflation.
All but one of 15 economists polled by Reuters last week had predicted the Reserve Bank would raise its repo rate by half a percentage point. One economist predicted a 100 basis point rise.
Before June, cumulative cuts amounting to 6,50 percentage points between 2003 and 2005 took commercial lending rates to 25-year lows.
Economists said the central bank was expected to continue tightening monetary policy due to a deteriorating inflation outlook and concerns about financing the country’s large current-account deficit.
Consumer price index inflation, the measure watched by the Reserve bank for monetary policy, rose to 5% in August from 4,9% in July, and there are fears it could breach the upper end of the 3% to 6% target range in the first half of 2007.
”With most analysts expecting another rate hike in December, we still think that even after that the risk of further tightening will remain high,” said Adenaan Hardien, economist at African Harvest.
Mboweni warned that the inflation outlook remained under threat, with record levels of credit demand and household debt fuelling domestic demand.
The country’s gaping current-account deficit of more than 6% of gross domestic product was also adding to pressure on the rand, inflation and interest rates.
The rand has lost about 17% of its value against the dollar so far this year, knocked by emerging-market jitters, falling commodity prices and the current account shortfall. — Reuters