(Wraps CPI, PMI and retail sales data)
* CPI steady at 6.1 pct y/y in Dec
* PMI back in contraction territory
* Retails sales growth lower than expected
By Phumza Macanda
JOHANNESBURG, Jan 18 South Africa's manufacturing sector is in the doldrums and growth in consumer demand slowed more than expected, suggesting economic growth might not be strong enough to withstand rate increases this year.
The Reserve Bank's first monetary policy committee meeting of the year is underway, with its decision due on Thursday around 1300 GMT.
The bank is expected to leave the repo rate unchanged at 5.5 percent with deliberations likely to focus on when it can start to safely raise rates without harming a sluggish recovery.
In a Reuters poll all 25 analysts expected the Reserve Bank to leave the repo rate unchanged with twelve expecting rates to start rising next year. Two saw a chance of another rate cut before year end 2012.
Government bonds firmed on the day and rates in the money market eased as Wednesday's data suggested monetary policy could remain accommodative for longer.
Annual inflation steadied at 6.1 percent in December, outside the Reserve Bank's target of 3 to 6 percent for the second month in a row on the back of food, fuel and administered prices, not demand pressures that could stoke a case for higher rates.
The bank sees inflation staying outside its target band for most of 2012 but has said it would not raise rates only on cost-push pressures such as food and fuel prices.
The Reserve Bank has to time its monetary tightening carefully because the economic recovery is still fragile.
Purchasing Managers Index data, a key gauge of manufacturing activity, fell to 49.4 in December, dipping into contraction territory after three months above the break-even point of 50.
"The PMI data bodes ill for the domestic economic outlook," said Standard Bank in a note.
"We believe that there is scope for the SARB to ease policy, particularly if downside risks to economic growth posed by the ongoing debt crisis in Europe, increase.
The Reserve bank has said although its primary focus remains inflation targetting, it would be sensitive to growth worries, which have been exacerbated by the crisis in the euro zone, which is South Africa's largest trading bloc.
On the demand side, retail sales slowed more than expected to 6.8 percent year-on-year in November, suggesting consumers are still struggling.
Consumer demand will contribute positively to fourth quarter growth but the 3.1 percent GDP growth seen by the National Treasury for 2011 and 3.4 percent this year are a fraction of the 7 percent needed to create jobs.
With the benchmark rate at 5.5 percent, the Reserve Bank still has room for further loosening should there be a need.
"The MPC may even cut rates if growth weakens significantly further," said Annabel Bishop, economist at Investec.
In the market, the yield on the 2015 bond fell 9.5 basis points to 6.675 percent and that on the 2026 bond was down by the same margin to 8.43 percent.
Rates in the FRA market - forward rate agreement that is a gauge of interest rates expectations - also fell with the 6x9 contract easing to 5.62 percent from 5.72 at the start of the week.
(Editing by Ron Askew)