May 24, 2018 / 1:47 PM / a year ago

UPDATE 2-South African central bank holds repo rate, sees upside risks to CPI

* Benchmark rate left unchanged at 6.5 pct

* Rising oil prices flagged as risk to CPI

* Banks says growth outlook remains challenging (Adds detail, context)

By Mfuneko Toyana and Alexander Winning

PRETORIA, May 24 (Reuters) - South Africa’s central bank kept its benchmark repo rate on hold as expected on Thursday following a rate cut at the previous meeting, as it balances risks to consumer price inflation and a fragile economic growth recovery.

Africa’s most industrialised economy has barely grown in the past decade with fiscal missteps and government corruption contributing to weak business and consumer confidence.

The South African Reserve Bank said the growth outlook remained challenging but was expected to outperform recent outcomes underpinned by better business and consumer confidence.

Investor sentiment has picked up since President Cyril Ramaphosa took the helm in February after the resignation of scandal-plagued Jacob Zuma.

The bank’s Monetary Policy Committee (MPC) unanimously decided to keep the repo rate at 6.5 percent and said it expects the economy to expand 1.7 percent this year, after growing by 1.3 percent in 2017.

“The MPC still assesses the stance of monetary policy to be accommodative and appropriate given the forecast inflation trajectory and the current state of the economy,” Governor Lesetja Kganyago told a news conference.

“However, with risks and uncertainties at high levels, the MPC will maintain its vigilance to ensure that inflation remains well within the inflation target range, and will adjust the policy stance should the need arise.”

The bank sees consumer inflation peaking at 5.3 percent in the third quarter, but would average 4.9 percent for the year.

While the rate of increase in consumer prices is not expected to breach the top-end of the bank’s 3-6 percent target during the forecast horizon, it said risks to the inflation outlook have tilted to the upside.

Rising oil prices and possible higher electricity tariffs posed risks to the inflation outlook, Kganyago said.

In February the National Treasury announced a VAT increase for the first time in two decades, which could hurt consumer demand, to cap ballooning debt and close a large revenue shortfall.

Kganyago said there was a degree of uncertainty regarding the likely impact of the VAT hike and sugar tax on food, and the extent to which these would be absorbed by manufacturers and retailers.

South Africa’s headline CPI quickened to 4.5 percent year-on-year in April after the VAT increase.

“The SARB makes no secret of the fact that it would like to see inflation expectations converge around 4.5 percent, and the best way to achieve this is actually to bring inflation down to similar levels, on a sustained basis,” Standard Chartered Bank’s Chief Africa Economist Razia Khan said.

At 1637 GMT, the rand, which has been under pressure in the past month from a strong dollar, was trading at 12.4100 against the dollar, 0.4 percent stronger than its close on Wednesday.

All 25 economists surveyed by Reuters had predicted the repo rate would stay on hold. (Additional reporting by Patricia Aruo Writing by Olivia Kumwenda-Mtambo Editing by James Macharia and Matthew Mpoke Bigg)

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