S. Africa CB Unexpectedly Hikes Interest Rates By 25 Bps

(RTTNews) - South Africa's central bank unexpectedly raised interest rates on Thursday, as inflation climbed to its highest level in almost five years.

The MPC has decided to continue on its gradual normalization path and raise the repurchase rate by 25 basis points to 5.75 percent, South Africa Reserve Bank Governor Gill Marcus said in a statement. Economists had expected the central bank to leave rates unchanged.

On January 29, the bank had lifted the rate by 50 basis points, which was the first raise in nearly six years. The hike came amid a sell-off in the financial markets over concerns regarding the withdrawal of stimulus by the Federal Reserve.

"Given the expected inflation trajectory, the real repurchase rate remains slightly negative and well below its longer term neutral level. The monetary policy stance remains supportive of the domestic economy, and, as before, any future moves will be gradual and highly data dependent," Marcus said.

Inflation accelerated to its highest level in almost five years in May, reaching 6.6 percent, holding above the central bank target of 3-6 percent. Recent food price developments surprised on the upside, the bank said today. After the May policy meeting, the bank had vowed action if there is a marked deterioration in the inflation outlook.

The SARB raised the 2014 inflation forecast to 6.3 percent from 6.2 percent. The figure is expected to peak at 6.6 percent in the fourth quarter, previously seen at 6.5 percent, after a slight moderation in the third quarter.

The inflation projection for 2015 was upgraded to 5.9 percent from 5.8 percent and the outlook for 2016 was lifted to 5.6 percent. Inflation is seen at 5.5 percent in the fourth quarter of 2016.

"Inflation is still expected to return to within the target band during the second quarter of 2015, provided that there are no further shocks to the system, particularly from possible higher tariff increases being granted to Eskom by Nersa from 2015," the SARB said.

Core inflation was forecast at 5.6 percent this year and 5.7 percent in 2015 and 5.5 percent in 2016. The MPC sees the risks to the headline inflation forecast to be skewed to the upside, Marcus said. The exchange rate of the rand continues to pose an upside risk to the inflation outlook, she added.

Assuming a speedy resolution to the metal workers' strike, the SARB forecast 1.7 percent growth for this year, which was much less than the 2.1 percent projection earlier. The forecasts for 2015 and 2016 were cut to 2.9 percent and 3.2 percent, respectively.