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UPDATE 2-South African central bank holds rates, no cut in prospect
May 25, 2017 / 1:45 PM / 7 months ago

UPDATE 2-South African central bank holds rates, no cut in prospect

* Benchmark repo held as expected at 7 percent

* Cbank says rand poses inflation risk

* Trims economic growth forecasts after ratings cuts (Adds more details, analyst)

By Mfuneko Toyana

PRETORIA, May 25 (Reuters) - South Africa’s central bank kept interest rates steady on Thursday, playing down prospects of cheaper borrowing costs as it weighed price pressures against expectations that the struggling economy will recover more slowly than hoped.

All 26 economists surveyed in a Reuters poll last week predicted the benchmark repo rate would stay at 7 percent , and Bank Governor Lesetja Kganyago said its tightening cycle had probably ended.

Annual consumer price inflation slowed to 5.3 percent in April, but there were risks it could rise again, he said, notably linked to pressure on the rand currency in light of domestic political uncertainty and credit ratings downgrades.

S&P Global Ratings and Fitch cut South Africa to “junk” in April and Moody’s put it on review for a downgrade after a cabinet reshuffle in which Pravin Gordhan, widely respected by markets, was fired as finance minister.

The central bank expects inflation to average 5.7 percent this year and 5.3 percent next - within its 3-6 percent target range.

Kganyago said interest rates could fall “should inflation continue to surprise on the downside and the forecast over the policy horizon be sustainably within the target range.”

“However, in the current environment of high levels of uncertainty, the risks to the outlook could easily deteriorate,” he told a news conference, adding that the longer-term inflation trajectory was “uncomfortably close to the upper end” of the range.

The rand gained after the rate decision and traded at 12.8600 per dollar by 1420 GMT, 0.5 percent firmer than its overnight close. Government bonds weakened..

The central bank cut its forecast for economic growth to 1.0 percent from 1.2 percent in 2017 and to 1.5 percent from 1.7 percent in 2018, saying the impact of the ratings downgrades was expected to weigh on domestic investment and consumer sentiment. (Additional reporting by TJ Strydom; Writing by Olivia Kumwenda-Mtambo; Editing by James Macharia and John Stonestreet)

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