July 19, 2018 / 1:24 PM / 3 months ago

UPDATE 2-S.Africa cenbank holds rates; sees inflation up, growth down

* Says inflation risks stoked by weak rand

* Cuts economic growth forecast

* Rand falls sharply after bank’s announcement

* Market expects unchanged rates well into 2019 (Adds quote, details, rand price)

By Olivia Kumwenda-Mtambo and Nqobile Dludla

PRETORIA, July 19 (Reuters) - South Africa’s central bank held benchmark interest rates on Thursday, signalling a readiness to tighten policy if needed in response to rising rand-driven inflationary pressures and a more uncertain global backdrop.

But it also cut its outlook for the local economy, cementing market expectations that, on balance, rates are unlikely to change until late next year.

All 25 economists surveyed by Reuters had predicted the repo rate would remain at 6.5 percent.

The bank forecast further volatility for the rand, which extended losses following the policy announcement, falling 2.1 percent on the day to 13.5350 per dollar by 1530 GMT.

The local currency has unexpectedly rallied this month, but it is still down around 9 percent against the dollar since the bank’s last meeting in May, and further weakness would raise the likelihood of inflation pushing past the upper band of the bank’s 3 to 6 percent target range.

“With risks and uncertainties at higher levels the MPC (policy committee) will continue to be vigilant and will not hesitate to act should there second-round effects that take us significantly away from the mid-point of the inflation target range,” central bank Governor Lesetja Kganyago said.

“Indications are that we have passed the low point of the current cycle,” Kganyago told a news conference, citing an escalating tariff dispute between the United States and higher global oil prices as the main inflationary dangers.

Headline consumer inflation quickened to 4.6 percent year-on-year in June, still well within the central bank’s target range.

Analysts said despite the hawkish tone struck by the bank, rates were likely to remain steady late into 2019.

“While the risks of a hike are rising, we think that weak growth will cause policymakers to hold their fire,” said Africa analyst at Capital Economics John Ashbourne in a note.

The bank cut its growth forecast for 2018 to 1.2 percent from 1.7 percent, saying economic activity would be constrained in the near term by weak consumer spending linked to the recent increase to value added tax and by unemployment, which is near record levels.

“The domestic economic growth outlook for this year is weaker than we expected in May,” Kganyago said.

The bank has previously faced pressure to lower lending rates to stimulate growth but has emphasized its main aim is to keep inflation in check.

The continent’s most industrialised economy suffered its worst quarterly contraction in nine years in the first quarter, and data since then has been mixed.

Additional reporting by Patricia Aruo Writing Mfuneko Toyana Editing by James Macharia and John Stonestreet

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