S.African central bank holds key rate, fears inflation

Despite weak economic growth South Africa's Reserve Bank opted to leave interest rates on hold on Thursday, fearing any move to stimulate the economy now could fuel inflation.

The bank left its key interest rate at 5.0 percent, underscoring a growing quandary facing policymakers in Africa's largest economy, who expect inflation to peak early next year.

Acknowledging the economic outlook had "deteriorated" the Pretoria-based bank nonetheless judged that the current level of stimulus was "appropriate."

At the end of the meeting, bank governor Gill Marcus unpacked a litany of problems facing the economy.

"The domestic growth outlook has deteriorated, while the upside risks to inflation have increased," Marcus said.

But, she added, the policy-setting committee did not discuss a rate cut at this time.

The central bank had been widely expected to stay the course, at what was its last meeting of the year.

But pressure is growing and many predict that the bank could make a move to cut rates early in 2013.

But it is far from clear that inflation will allow that to happen.

On Wednesday, Statistics South Africa reported that inflation stood at an annualised rate of 5.6 percent in October.

That is at the upper end of the bank's three to six-percent target for consumer prices.

Marcus predicted that consumer price inflation would run at 5.5 percent next year and 5.0 percent the year after, with a peak of 5.7 percent in early 2013.

Increases in food prices, which in October rose at the fastest rate since 1994 and a weakening rand both played a role.

South Africa is highly dependent on imports. A weaker currency increases the cost of many goods bought into South Africa, with the country effectively importing inflation.

But Marcus also warned a slew of generous pay settlements designed to end recent deadly strikes could push inflation up further and cause a "wage price spiral."

But, she said, "the impact will be moderated to some extent by the inevitable job losses that are likely to accompany such increases in the context of a slowing economy."

--

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