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South Africa keeps interest rate at 5.75%

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Locator map of South Africa. Source: UN Office for the Coordination of Humanitarian Affairs (OCHA)

Locator map of South Africa. Source: UN Office for the Coordination of Humanitarian Affairs (OCHA)

South Africa’s central bank left its benchmark interest rate unchanged at 5.75 percent on Thursday, warning that inflationary pressure was growing due to a rebound in oil prices, the declining rand and rising wages.

Africa’s second-largest economy has struggled for growth recently, expanding just 1.5 percent last year, the slowest pace since 2009, and rolling power outages across the country are set to impact industry in the coming years.

A cut in interest rates would provide a boost to growth, but spur inflation, which the South African Reserve Bank said it now sees rising to an annual rate of 4.8 percent compared to an earlier forecast of 3.8 percent.

For 2016 the central bank raised its forecast to 5.9 percent from 5.4 percent.

The central bank’s target for annual inflation is between three and six percent.

The bank said the recent inflation dip to a four-year low of 3.9 percent in February was not expected to last.

“Recent oil price and exchange rate developments suggest that this is likely to be the low point for the medium term inflation trajectory,” it said.

“The rand exchange rate has depreciated further, adding to upside inflation risks, against the backdrop of the expected, but uncertain, tightening of US monetary policy,” bank governor Lesetja Kganyago said in a statement.

US rates are expected to tighten after strong growth in the dollar, but the timing of any such move remains unclear.

“The domestic economy, however, remains weak amid electricity supply constraints, and relatively subdued domestic demand,” said the central bank.

The South African Reserve Bank’s decision was in line with economists’ forecasts.

“It was clear that the Monetary Policy Committee (MPC) is worried about the growth outlook… but remains focused on the inflation target,” Nazmeera Moola, an economist at Investec Asset Management, said.

“If the rand weakens notably or wage settlements surprise on the upside, then a rate hike this year becomes very likely.”



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