* Central bank says upside risks to inflation persist
* Bank says on a monetary tightening trajectory
* Analysts expect a rate rise in Q2
(Adds reaction, background, changes dateline)
By Stella Mapenzauswa
JOHANNESBURG, March 27 South Africa's Reserve
Bank left interest rates unchanged on Thursday to give the
ailing economy some relief, but hinted strongly at increases
soon to rein in inflation.
The bank had unexpectedly raised its benchmark repo rate for
the first time in nearly six years at its last meeting in
January, to fight inflation pressures stemming from a sharp fall
in the rand during a rout of emerging market currencies.
The currency has since picked up and central bank Governor
Gill Marcus said the stronger rand had tempered inflation risk
in the medium term. But she also noted that upside price risks
persisted as the currency remained vulnerable to shifts in
global risk sentiment.
"There will be interest rates increases," Marcus told a
press conference after Thursday's meeting.
"It is that trajectory. There should be no mistake about
that," she said, adding there would not necessarily be a change
in the stance at every meeting, and hikes might not always be of
the same magnitude.
The rand extended gains against the dollar on the
hawkish comments to hit 10.5615, its strongest level since Jan.
2, according to Reuters data.
Government bonds rallied and yields fell, with analysts
talking of relief in the market that the Reserve Bank had not
tightened rates immediately as some players had been pricing in.
The bank's next policy meeting will not be until May 22,
after a general election on May 7, which President Jacob Zuma's
African National Congress party is set to win with a reduced
majority amid discontent with the government's failure to revive
Rate rises would further pressure Africa's biggest economy
which is beset by strikes in the mining industry and annual
growth languishing below 3 percent since a 2009 recession.
After the central bank raised the repo rate by 50 basis
points in January to 5.50 percent, 23 of 30 economists surveyed
by Reuters this week had expected no change in rates on
Thursday, as the bank balanced the need to keep inflation in
check with that of promoting growth.
But nearly two-thirds of those polled felt a rate hike was
inevitable in the second quarter of the year, with a weaker rand
seen pushing inflation higher.
"While the risk to the inflation outlook from the exchange
rate may have moderated somewhat since the previous meeting,
these risks are still assessed to be on the upside," Marcus
This poses a dilemma for the Reserve Bank, given the subdued
economic outlook and uncertainty about whether there will be a
stable and adequate electricity supply in coming months as
creaking infrastructure hobbles state utility Eskom's ability to
Still, the central bank had left little doubt it was ready
to act swiftly on price pressures, said Malcolm Charles, a
portfolio manager at Investec Asset Management.
"Should the situation deteriorate, we have no doubt that
they will do the right thing and hike again. We expect a further
50-75 basis points of hikes this year."
(Additional reporting by Johannesburg newsroom; Editing by
David Dolan and Susan Fenton)