JOHANNESBURG, May 28 (Reuters) - The South African rand was slightly stronger on Thursday afternoon, as the central bank raised its key interest rate and data showed a sharp pick-up in producer inflation in April.

o At 1410 GMT, the rand traded at 16.32 against the dollar, up about 0.3% on Wednesday's closing level.

o The South African Reserve Bank lifted the policy rate by 25 basis points to 7%, its first hike in three years.

o The decision makes South Africa one of the few emerging markets to have tightened policy during the Iran war.

o The central bank said the move was needed to bring inflation back to target, after it accelerated sharply in April.

o Consumer inflation reached 4% in annual terms last month whereas the bank aims for 3%.

o On Thursday, data showed producer inflation also quickened sharply last month, reaching 4.8% year-on-year, up from 2.3% in March.

o South Africa's benchmark 2035 government bond was slightly firmer, as the yield fell 6 basis points to 8.42%.

(Reporting by Alexander Winning and Anathi Madubela; Editing by Vijay Kishore)