Pretoria - South Africa's Reserve Bank raised its benchmark repo rate by half a percentage point on Thursday, as expected, saying the outlook for inflation had deteriorated significantly even as economic growth slowed.
The rand, whose decline over the past year has helped to fuel price pressures, rallied to a three-week high after the rate increase, and government bonds gained.
“Previously, the committee expressed concerns about the growing risks to the inflation outlook, mainly due to exchange rate and food price risks,” Governor Lesetja Kganyago told a news conference after the bank's Monetary Policy Committee held its first meeting of the year.
“These risks appear to be materialising and have contributed to the significant deterioration of the inflation forecast.”
The bank last raised rates by half a point in July 2014.
Nineteen of 31 economists polled by Reuters last week correctly predicted the central bank would raise rates by 50 basis points to 6.75 percent. Eleven expected a 25-basis-point increase.
Kganyago conceded that the rate decision - the vote for which was not unanimous - had been complicated by a worsening growth outlook for Africa's most industrialised economy. The central bank cut its growth forecast for 2016 further, to 0.9 percent from 1.5 percent.
“While the hike is painful, the severe instability we have experienced in recent weeks had to be addressed as the effects of an unstable currency and rising prices will hurt all consumers,” First National Bank CEO Jacques Celliers said.
The rate increase is likely to raise the ire of labour unions but will go some way towards reaffirming the independence of the central bank. That should please ratings agencies, which have warned of downgrades after President Jacob Zuma inexplicably fired the finance minister in December.
The rand plunged after Zuma's move, extending its losses against the dollar to 25 percent in 2015.
It has already given up another 5 percent so far this year, weighed down by concerns over sluggish SA growth, as well as a slowdown in China.
The rate decision was in line with moves by central bankers across emerging markets to prop up their currencies as rising concerns over the health of the global economy, a weaker yuan and a tumble in commodity prices have fanned risk aversion.
Mexico has regularly sold dollars to stabilise the peso, while Brazil has said it might dip into dollar reserves to support the real and the central banks of Angola and Peru have recently raised lending rates.
Kganyago said the rand exchange rate had declined by 13.5 percent since the last MPC meeting in November, contributing significantly to the deterioration in its inflation forecast.
But South Africa's monetary policy-makers have previously said they would not try to influence the rand exchange rate, an assertion Kganyago reiterated on Thursday.
The rate hike bolstered the rand all the same, pushing it as much as 1.7 percent higher on the day to a near three-week high of 16.1550.