Lesetja Kganyago, the governor of the South African Reserve Bank. Picture: Carlo Allegri, Reuters

Johannesburg - The South African Reserve Bank has hiked interest rates by a further 0.5 percent percent as the economy continues to take strain.

Citing growth constraints to the economy, with GDP now expecting to only come in at 1.3 percent in 2015, and potential upside risks to inflation, reserve bank governor Lesetja Kganyago said the committee had taken an accommodative approach to interest rates.

“The bank’s estimate of potential output growth was revised down from 1.9 percent to 1.5 percent for 2016, and from 2.1 percent to 1.6 percent for 2017.” Kganyago said the bank had to balance growth constraints with inflation, which was being pushed by food prices as SA’s worst drought on record eats into production.

This hike takes the repo rate to 6.75 percent percent from 6.25 percent and the main lending rate from 9.75 percent to 10.25 percent. This is the third hike in a row, after two consecutive 0.25 percent hikes in the second half of last year and will weigh on concerns that SA is in an upward rate cycle.

The Reserve Bank’s mandate is to keep consumer price inflation in a bracket of 3 percent to 6 percent. However, Inflation climbed to a one-year high of 5.2 percent in December, from 4.8 percent the month before. The Producer Price Index has also been climbing and Investec expects both CPI and PPI to hit 7 percent this year.

In a statement, the governor said inflation is now expected to average 6.8 percent in 2016 and 7 percent in 2017.

This compares with the previous forecast of 6 per cent and 5.8 percent for these years.

“Inflation is still expected to breach the upper end of the target in the first quarter of 2016, but is now expected to remain outside the target for the entire forecast period. A peak of 7.8 percent is expected in the fourth quarter of 2016 and the first quarter of 2017,” he told journalists in Pretoria on Thursday afternoon.

Several economists and analysts had predicted a rate hike of at least 0.25 percent, with some suggesting a 0.5 percent increase was necessary to pull SA’s rand back to calmer waters.

All but two of the 26 economists surveyed by Bloomberg predict the central bank will raise the benchmark rate from 6.25 percent, with the majority anticipating more than the 25 basis-point adjustments made twice of 2015 as growth prospects dim.

The rand has slumped 30 percent against the dollar since the start of last year and has failed to break past the R15 mark. The push factors have included fears over emerging markets, a commodities rout, power shortages and also lost ground somewhat after a decision by President Jacob Zuma in December to fire Nhlanhla Nene as finance minister.

There have also been suggestions that the rand has been manipulated downwards by the big banks, which have either illegally manipulated the currency, or sold it short.

There are also increasing worries that SA, Africa’s most industrialised economy, will slip into a recession this year.

SA narrowly missed a recession last year when third quarter growth recovered somewhat by gaining 0.7 percent after the economy contracted 1.3 percent in the second quarter.

The likelihood of Africa’s most-industrialised economy contracting for two successive quarters in 2016 is 45 percent, according to the median estimate of nine economists surveyed by Bloomberg this month. That’s up from a 25 percent probability in December. Four of the analysts predict a recession this year.

According to the International Monetary Fund, SA ‘s gross domestic product will only expand by 0.7 percent this year. That forecast has been slashed by almost half.

The bank will “act with resolve” if inflationary pressures from the weaker rand spread more broadly in the economy, Kganyago said in an interview with Bloomberg TV in Davos last week. He also said 25 basis points isn’t a “small” adjustment.