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S. Africa's repo rate increases by 25 basis point to 7 pct

Xinhua, March 17, 2016 Adjust font size:

The South African Reserve Bank (SARB) on Thursday increased the repo rate by a 25 basis point to seven percent per annum, effectively from March 18, 2016.

The prime lending rate, the figure charged by banks to customers, will increase to 10.5 percent.

In January the bank hiked the repo rate by 50 basis points to 6.75 percent, pushing the prime lending rate to 10.25 percent.

Before the announcement, economists were divided on whether the bank would hike rates or keep them unchanged as it tries to tame the stubborn inflation.

"Food price pressures, driven by the drought and the depreciated exchange rate, have intensified by more than previously forecast and remain a significant upside risk to inflation,"SARB Governor Lesetja Kganyago said.

The bank has also revised down its economic growth forecast for this year to 0.8 percent from 0.9 percent before.

"It is the third successive hike and, as we all know by now, interest rates are set to continue climbing this year as we are amidst one of the toughest economic cycles in the country's history," Samuel Seeff of Seeff Properties told Xinhua.

Rising inflation and a volatile rand are some of the main concerns of the reserve bank, Kganyago said.

The rand took a hard knock after the elite police, the Hawks demanded that Finance Minister, Gordhan respond to allegation that he set up a "rogue unit"to spy on taxpayers at the South Africa Revenue Service which he led before 2009.

While inflation was at 6.2 percent for January - above the bank's targeted range of 3 percent - 6 percent - the bank expects inflation to return to within its target bracket by the end of 2018.

The repo rate increase will mean that the cost of borrowing will go up, leaving most consumers under pressure. The country's growth projections have been revised downwards due to the precarious economic climate, according to Miyaleni Mkhabhela, an economist at Antswisa Management Group.

This week's sharp fall in the rand, as a result of the intensifying tensions between the Minister of Finance Pravin Gordhan and the Hawks, will make it harder for the central bank to decide its next move on interest rates, as it weighs concerns about waning economic growth against those on rising inflationary pressures.

"Rand is likely to remain volatile but unlikely to move dramatically outside of R15-R17 trading range following certain political developments," Chief economist of econometrix.co.za, Azar Jammine said.

"Consumers will be required to tighten their belts once again, although many may not have any notches left to tighten, said Miyaleni Mkhabhela, an economist of Antswisa Management Group.

He predicts another interest hike by at least 2 percent within two years. Endit