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Sarb rethinks interest rate hikes

Pretoria - The South African Reseve Bank (Sarb) will probably raise interest rates more slowly than it did in a tightening cycle six years ago due to the economy's current slow growth, the bank said, dampening expectations of steep hikes in the repo rate.

Sarb raised rates for the first time since 2008 in January, hiking the repo rate by 50 basis points to 5.5% in a bid to stabilise prices while the currency plummeted.

Speaking at a dinner on Thursday, Sarb governor Gill Marcus said that the environment was different to 2008 and that previous market expectations of a further 200 basis points worth of rate hikes were overdone.

"Today we have a very different situation, with the output gap being negative and subdued growth in both household consumption and expenditure and credit extension," said Marcus.

"We would therefore expect the monetary policy response to be more moderate, given our concerns about the slow growth of the economy."

Africa's largest economy is struggling to gain traction after a 2009 recession.

However, Marcus said the moderate base case she was envisaging was not an unconditional commitment on the part of the bank and would depend on data and other global developments.

"It also does not mean that there will be adjustments at every meeting or that if rates are increased, that they will be increased by the same amount," she said.

Heightened uncertainty

Marcus conceded that the current period of heightened uncertainty and volatility in global markets made the bank's own forecasts more uncertain and subject to greater risk.

While the bank has recently tended to change rates in 50 basis-point moves, she said it could use smaller increments.

"(The moderate policy base case) does not mean that there will be adjustments at every meeting or that if rates are increased, that they will be increased by the same amount."

The rand has plummeted along with other emerging market currencies, testing a string of five-year lows this year.

Sarb has warned of significant inflation risks from the weak currency.

It will hold its second meeting of the year in two week's time.

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