South Africa raises interest rate, citing Iran war price shocks

By Kopano Gumbi and Sfundo Parakozov

PRETORIA, Sept 23 (Reuters) - South Africa's central bank raised interest rates for the second time this year on Wednesday, saying the Iran war had triggered "large and sustained" price shocks and tighter policy was needed to prevent higher inflation from becoming entrenched.

The decision by the South African Reserve Bank's Monetary Policy Committee to raise the policy rate by 25 basis points to 7.25% was unanimous ZAREPO=ECI and in line with the average forecast in a Reuters poll of economists.

It follows rate increases by major global central banks including the U.S. Federal Reserve, the European Central Bank and the Bank of Japan, which are also grappling with the impact of an escalation in hostilities in the Middle East.

"South Africa's growth recovery has slowed, while inflation has increased well above our target," SARB Governor Lesetja Kganyago told a press conference.

Kganyago said it was crucial that inflation reverts to the central bank's 3% target as the latest fuel price pressure fades, hours after official data showed headline inflation edged up to 4.4% year on year in August ZACPIY=ECI.

GLOBAL SHOCKS HURT

South Africa's central bank raised its near-term inflation forecasts and lowered this year's economic growth forecast to 1.2% from 1.4% previously. The bank now forecasts headline inflation will rise above 5% later this year, and only be back around 3% towards the end of 2027.

"Global shocks are clearly hurting our economy," Kganyago said, adding that services inflation was a worry, although food prices have been relatively contained and the rand has been resilient so far.

'MEASURED AND PROPORTIONATE'

Kganyago said MPC members discussed both holding rates as well as a 50-bps hike, but ultimately settled on a middle path.

"We are measured, ... we make sure the policy action we take is ... proportionate to the problem we are trying to deal with," he told reporters in a question-and-answer session.

The SARB is scheduled to have one more interest rate announcement this year, in mid-November.