March 30, 2017 / 3:02 PM / a year ago

UPDATE 1-South Africa cbank keeps rate steady, worried about political uncertainty

* Rand rises in response to rate decision

* One of of six MPC members votes to cut rate

* Inflation, growth seen improving (Adds governor, analyst quotes)

By Olivia Kumwenda-Mtambo

PRETORIA, March 30 (Reuters) - South Africa’s central bank kept its benchmark repo rate unchanged at 7 percent on Thursday, in line with expectations, saying the exchange rate had re-emerged as a risk to inflation following an increase in domestic political uncertainty.

Governor Lesetja Kganyago said while the near-term inflation and growth outlooks had improved and the bank had reached the end of its tightening cycle, the sharp fall of the rand posed a risk. The currency tumbled this week on President Jacob Zuma’s plan to fire Finance Minister Pravin Grodhan.

The ANC-allied South African Communist Party said earlier it objects to Zuma’s intention to sack Gordhan and his deputy Mcebisi Jonas, in the first public confirmation that Zuma intends to dismiss the ministers.

The rand responded to the rate decision by gaining to 12.8225 by 1330 GMT, just shy of a session high of 12.82. Government bonds also firmed.

“While most measures of emerging market risk have narrowed over recent months, those for South Africa have widened again over the past few days,” Kganyago told a media conference in Pretoria, alluding the political uncertainty.

“The rand is likely to react further to unfolding developments until a greater degree of certainty and confidence is restored.”

Five of the six members of the Monetary Policy Committee voted to keep the rate unchanged, while one voted for a 25 basis points reduction. The bank has raised rates cumulatively by 200 basis points since early 2014.

The bank revised its inflation outlook, predicting that inflation would fall back into its target range of between 3 and 6 percent by the second quarter of the year, two quarters earlier than its previous forecast.

All 30 economists surveyed in a Reuters poll last week predicted the bank would keep rates on hold.

The bank raised its forecast for economic growth to 1.2 percent in 2017 and 1.7 percent in 2018 citing modest improvements in the manufacturing and mining sectors, but warned that economic activity remained constrained.

“The MPC is concerned that increased political uncertainty could impact negatively on private sector investment and household consumption expenditure,” Kganyago said.

Sizwe Nxedlana, chief economist at First National Bank, said the bank’s dovish tone suggested it was less worried about inflation, but noted that “the recent political uncertainty and the associated rand weakness has reduced the odds of a rate cut later this year.” (Additional reporting by TJ Strydom in Pretoria; Writing by Mfuneko Toyana; Editing by James Macharia)

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