Reserve Bank. Picture: SUPPLIED
Reserve Bank

THE Reserve Bank is set to continue raising interest rates modestly in coming months as the worst drought in a century and a weaker rand ramps up the outlook for inflation, a Reuters poll found.

The central bank already decisively front-loaded its repo rate by hiking 50 basis points to 6.75% in January to tackle the threat of higher inflation it highlighted last month.

However, the next hikes are set to be the usual moderate increment of 25 basis points. After starting in May, the Reserve Bank will then add the same again in the third quarter, leaving it at 7.25% to the end of the year, according to the poll.

Key to the local repo rate and rand outlook is the pace at which the US Federal Reserve raises its own rates.

Higher rates in the US could boost the dollar even more, leaving emerging market currencies like the rand under more pressure.

But testimony from Fed Chair Janet Yellen on Wednesday suggested it might be a while before the next rate hike, even though trouble in financial markets is not likely to reverse its plans to tighten further this year.

In the meantime, the average rate of consumer inflation in South Africa is expected to quicken to 6.4% this year, 0.4 percentage point higher than the January consensus. The Reserve Bank wants inflation within a 3-6% target range.

"We see such high inflation this year from the worrying mix of historic foreign exchange pass-through as businesses cannot compress margins any more," said Peter Attard Montalto, emerging market economist at Nomura International.

Electricity price increases, higher real wage growth and the drought causing waves of food price pressures were additional concerns, he said.

Economic growth is still forecast to be 0.9% this year. Next year’s performance is expected at 1.5%, 0.2 percentage points lower than last month’s consensus and well behind its potential.

Analysts listed softer commodity prices and electricity supply shortages were expected to be the top risks to South Africa’s growth performance, followed by political upheaval, a credit rating downgrade, and prolonged drought.

Reuters