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UPDATE 2-South Africa's central bank warns rate hikes imminent as repo stays steady for now
March 27, 2014 / 1:50 PM / 4 years ago

UPDATE 2-South Africa's central bank warns rate hikes imminent as repo stays steady for now

* 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 (Reuters) - 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 the economy.

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 said.

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 meet demand.

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)

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