This would keep in step with attempts by Turkey and other emerging market economies to shore up their currencies, but risking the ire of the ruling ANC shortly before an election.
“Exchange rate pressures are expected to intensify as markets adjust to the new pattern of global capital flows,”
South African Reserve Bank (SARB) governor Gill Marcus told a news conference.
“The primary responsibility of the Bank is to keep inflation under control and ensure that inflation expectations remain well anchored.”
Marcus said the rate decision had not been influenced by Turkey’s surprise huge rate hike on Tuesday and was not aimed at affecting the exchange rate.
However, it came as the rand headed towards five-year lows during an emerging market sell-off that began last week.
Financial markets, however, appeared to view the rate rise as insufficient and the rand was down more than 2 percent after the rate decision at 11.2500 per dollar, getting closer to a five-year low hit last week.
The Reserve Bank raised the repo rate, at which the central bank lends to commercial banks, to 5.5 percent from four-decade lows of 5.0 percent, the first rate rise in nearly six years.
Yields on the short-dated 2015 bond rose 30 basis points to 6.99 percent.
A huge surprise rate hike by Turkey on Tuesday put pressure on South Africa’s central bank to tighten policy as emerging market assets are being hit by concerns about reduced US monetary stimulus, large current account deficits – a problem for South Africa – and in the case of Turkey, domestic political concerns.
South African Forward Rate Agreements (FRAs) due in 12 months jumped to nearly 7 percent on Wednesday, suggesting rates in Africa’s biggest economy could go up by as much as 200 basis points this year.
Interest rates had been on hold since a cut in July 2012.
The rate rise, however, risks harming already slow economic growth and may cause tensions with the ruling African National Congress (ANC) party and President Jacob Zuma, who faces a tough election in around three months’ time due to the struggling economy, typified by chronic unemployment and widespread social and labour unrest.
In the last two weeks, at least seven people have been killed by police trying to control riots over poor public services in black townships that have seen little improvement in the quality of life since the end of apartheid in 1994.
The mining sector, a major source of foreign exchange, continues to be plagued by strikes, with many platinum mines at a standstill due to a week of industrial action.
Unions and management met for a fourth day of talks on Wednesday but there was no sign of a breakthrough.
Disputes are harming economic growth, which slowed to 0.7 percent quarter-on-quarter in Q3, its slowest pace since a 2009 recession.
All 34 economists surveyed by Reuters last week – before Turkey’s rate hike – said the bank would keep the repo rate on hold.