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Sarb warns of ratings downgrade, interest rates hikes

Pretoria - The South African Reserve Bank would continue raising interest rates in order to keep rising inflation in check despite the costs to the economy, the bank said at its monetary policy forum on Monday.

The bank has raised benchmark lending rates by a total of 200 basis points in the last two years as it fights accelerating consumer prices triggered by a depreciating currency, drought and above-inflation wage hikes.

"Tolerating additional inflation in the short run could require larger interest rate adjustments later, with proportionally greater cost for the economy," the bank said.

The bank expects headline inflation in Africa's most industrialised economy to peak at 7.8% in 2016, well outside the limit of its upper target of 6%.

Sarb said the sharp fall of the currency, by about 20% against the dollar since December, had been large and sustained enough to have a lasting effect on the economy and monetary policy.

The bank in March trimmed its growth forecast to 0.8% for 2016 from the 1.5% it forecast in November, saying that household debt, electricity shortages and weak global growth were persistent strains on growth.

The bank said on Monday that monetary policy can have little effect on potential growth, and that it would remain committed to influencing growth through long-term borrowing costs.

It also warned that a ratings downgrade would hit the currency hard and see short-term interest rates rise 80 basis points while longer-term bond yields would likely increase by 104 basis points.

Higher borrowing costs would likely see the government allocate more spending towards debt-service costs, it said.

South Africa faces the prospect of credit downgrades to junk status as it grapples with depressed commodity prices, political upheavals and an economy that is barely growing.

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