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SA raises main lending rate for first time in 3 years

Reserve Bank governor Lesetja Kganyago. Picture: FREDDY MAVUNDA
Reserve Bank governor Lesetja Kganyago. Picture: FREDDY MAVUNDA

SA's central bank raised its main lending rate by 25 basis points to 3.75% in a close call on Thursday, the first rate hike in three years in response to growing inflation risks.

Governor Lesetja Kganyago said while the monetary policy committee (MPC) expected inflation to stay close to the midpoint of its target range over the forecast period, inflation risks had increased since the last meeting in September.

"Given the expected trajectory for headline inflation and upside risks, the committee believes a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates," he told a news conference.

The decision was split 3-2 on the five-person MPC. Economists in a Reuters poll had been divided on the outcome.

The rate hike comes after the South African Reserve Bank (SARB) flagged inflation risks in a monetary policy document last month.

"For markets, the key focus now is how much and how rapid a tightening to anticipate," said Razia Khan, chief Africa economist at Standard Chartered Bank.

GRADUAL PATH

The SARB has lagged some other emerging market central banks, such as Russia and Brazil, in raising rates because domestic inflation has risen more modestly.

The central bank slashed its repo rate by 300 basis points last year to a record low to keep the coronavirus-ravaged economy afloat.

But annual inflation has accelerated from January's 3.2% before stabilising at 5.0% in September and October, above the midpoint of the bank's 3%-6% target range.

Global producer and food inflation, oil prices and domestic electricity prices were among the main inflation risks cited by the SARB on Thursday.

The central bank revised slightly higher its headline consumer price inflation estimate for 2021 to 4.5% from 4.4%. The forecast for core inflation, which strips out food and energy prices, was unchanged at 3.0% this year.

The SARB sees this year's economic growth at 5.2% and next year's at 1.7%.

The rand briefly extended losses after the rate hike was announced, before recovering ground later on. Some traders had priced in a more aggressive rate trajectory than the gradual path laid out by the MPC, analysts said.

The SARB's next rate meeting is in January.

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