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Sarb hikes interest rate

Reserve Bank Governor Lesetja Kganyago has increased the repo rate by 25 basis points.

FILE: Lesetja Kganyago. Picture: Reinart Toerien/EWN.

JOHANNESBURG - Interest rates will increase by 25 basis points, South African Reserve Bank (Sarb) governor Lesetja Kganyago announced on Thursday.

He made the revelation following a three-day Monetary Policy Committee (MPC) meeting in Pretoria.

The decision means the repo rate, the interest charged by Sarb to banks, will rise to six percent. The prime lending rate, the interest charged by banks to customers, will jump to 9,5 percent.

Kganyago and his fellow MPC members have repeatedly warned that the central bank couldn't delay a rates hike as the local economy struggled with sluggish growth, a weaker rand and an increasing inflationary trajectory.

"The rand remains a significant risk factor to the inflation outlook, given the vulnerability of the rand and long bond yields to possible US interest rate increases."

He has cautioned against inflation pressures but says the forecast over the next two years falls within the three to six percent target zone resulting in its rates decision.

He has also cautioned that inflation is set to climb to the upper end of the scale and rates may have to be hiked.

"The committee is concerned that the failure to act against these heightened pressures and risks will cause inflation at expectations to become entrenched at higher levels."

Kganyago says the economy has weathered the storm after the Greek crisis, but has lost ground against major currencies.

He says the declining price has been welcomed with fuel prices dropping by about 90 cents over the past two months.

But he says the oil price is set to increase.

The vulnerable rand and weaker commodity prices are also cause for concern, with inflation spiralling upward.

"The MPC has therefore decided to continue on its path of gradual policy normalisation. Accordingly the repo rate will increase with effect from 24 July 2015."

Food price increases are also a concern as drought continues throughout the country.

"The continuing droughts in parts of the county have contributed to the upside risk to the outlook, despite benign food inflation."

But he says the outlook for hold consumer is subdued, worried about second round of inflation.

"We have to be mindful of the risks of second round effect on inflation."

Year-on-year inflation for June came in at a lower-than-expected 4,7 percent, but it is expected to breach Sarb's inflation ceiling of six percent in the first quarter of 2016.

Policy makers were also under pressure to up rates as the US Federal Reserve repeatedly signalled moves that it was close to tightening rates, possibly later this year.

Economists had been widely split on whether the central bank would up rates with a poll conducted by Reuters earlier in July finding 17 economists forecasting a hike while 15 said rates would remain on hold.

Another survey conducted by Bloomberg found 17 of 31 economists predicted an increase.