January 18, 2018 / 2:22 PM / a month ago

UPDATE 1-South Africa holds rates as inflation risks offset rand strength

* South Africa holds rates, as expected

* Monetary policy committee votes 5-1

* Bank raises growth forecasts for 2018, 2019 (Adds detail, quotes, context)

By Mfuneko Toyana and Nqobile Dludla

PRETORIA, Jan 18 (Reuters) - South Africa’s central bank kept its benchmark repo rate unchanged at 6.75 percent on Thursday, saying that risks to inflation were still on the upside despite a recent strengthening of the rand currency.

The majority of analysts polled by Reuters last week had predicted the repo rate would stay on hold, but forward markets had pencilled in the possibility of a 25 basis point rate cut.

“The risks to the (inflation) forecast are still assessed to be on the upside, though the degree of upside risk has subsided,” Reserve Bank Governor Lesetja Kganyago told a news conference.

Kganyago said five members of the bank’s monetary policy committee had voted to hold rates and one member had voted for a 25 basis point cut.

The rand strengthened against the dollar on Thursday’s decision, as some investors had bet that the central bank would cut rates.

In November, when the bank last met on rates, it also kept them on hold.

But since then inflation slowed to close to the mid-point of the bank’s target range of 3 percent to 6 percent and South Africa avoided a potentially damaging double ratings downgrade.

“Inflation is expected to reach a low point below the midpoint of the target range, but then is expected to resume an upward trajectory and measure 5.5 percent in the final quarter of next year,” he said.

The rand has gained more than 13 percent against the dollar since the Nov. 23 rates meeting, lifted largely by Cyril Ramaphosa’s election as leader of the ruling African National Congress (ANC) in December.

Kganyago said on Thursday that the rand was expected to remain sensitive to political developments and that the lingering prospect of a future ratings downgrade would weigh on the currency.

On growth, he said that South Africa’s economic prospects appeared to be improving, though from a low base. He called the outlook for the economy “challenging” and “fragile”, despite the bank raising its growth forecasts slightly to 1.4 percent for this year and 1.6 percent for 2019.

Reporting by Mfuneko Toyana and Nqobile Dludla; Editing by Alison Williams; Writing by Alexander Winning

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