June 12 (Bloomberg) -- South Africa's central bank raised its benchmark interest rate by half a percentage point, the sixth increase in a year, forecasting that rising food and energy costs will keep inflation outside of the target until 2010.

The Monetary Policy Committee lifted the repurchase rate to a five-year high of 12 percent, Governor Tito Mboweni said in a televised speech from Pretoria today. Eight of 26 economists surveyed by Bloomberg had forecast the decision, while the rest expected a 1 percentage point increase.

Central banks in India, Brazil and Russia have raised interest rates this month as surging oil and food prices boost inflation, replacing the credit squeeze as their main concern. South African inflation, which reached 10.4 percent in April, will peak at 12 percent, and won't return to the 3 percent to 6 percent target range until the third quarter of 2010, Mboweni said.

``The inflation outlook is bleak,'' said Rudolf Gouws, chief economist of Rand Merchant Bank in Johannesburg. ``It was the correct decision. If oil prices go up more, if electricity tariffs go up more, they will have to hike interest rates more.''

The rand plunged as much as 1.5 percent to 8.138 against the dollar after the central bank raised the rate by less than many analysts expected. The currency was at 8.104 as of 5 p.m. in Johannesburg from 7.969 before Mboweni began speaking. The yield on the R153 government bond, due 2010, fell 23 basis points, or 0.23 percentage point, to 11.55 percent.

Deteriorating Outlook

Gasoline costs have climbed to a record as crude oil traded above $130 a barrel and the rand's 14 percent decline against the dollar this year boosted import costs. The Reserve Bank is also concerned that a proposed 60 percent increase in electricity tariffs this year will raise inflation and wage demands.

``The outlook for inflation remains bleak in an environment of sustained increases in international oil and food prices,'' Mboweni said. ``Adding to the inflation uncertainty is the impending announcement of the electricity price increases'' to be granted Eskom Holdings Ltd., the state-owned power utility.

The bank's inflation forecast doesn't include a tariff increase of more than the 14.2 percent awarded to Eskom in December, Mboweni added.

The Reserve Bank is concerned that rising inflation expectations will boost wage demands. Analysts, businessmen and labor union officials surveyed in the second quarter expect inflation to average 8.9 percent this year, up from the 7.8 percent forecast in the first quarter, the Bureau for Economic Research said in a statement today.

Slowing Down

Most economists surveyed by Bloomberg expected borrowing costs to rise by 1 percentage point after Mboweni said on May 28 that ``drastic measures'' were needed to curb prices, while two policy makers said last week that inflation will exceed the target until 2010.

Mboweni tempered those comments today, pointing to a slowdown in economic growth. Consumer spending rose an annualized 3.3 percent in the first quarter, down from 3.8 percent in the previous three months, mainly due to a drop in car sales, the governor said.

``From the perspective of the real economy weakening, it's the right decision,'' said Rian Le Roux, chief economist of Old Mutual Investment Group in Cape Town. ``The economy is weakening. There is a lot of pain to come that is not reflected in the numbers.''

The economy expanded an annualized 2.1 percent in the first quarter, the slowest pace in more than six years.

The current account deficit, which reached about 9 percent of gross domestic product in the first quarter, may also add to pressure to the rand and inflation, Mboweni said. South Africa relies mainly on foreign investment in stocks and bonds to fund the deficit, an inflow that can reverse when investors sell off riskier, emerging market assets.

``It's extremely concerning,'' said George Glynos, Managing Director of Econometrix Treasury Management in Johannesburg. ``I don't believe monetary policy tightening has ended.''

To contact the reporters on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net; Mike Cohen in Cape Town at mcohen21@bloomberg.net

Last Updated: June 12, 2008 11:13 EDT