Inflation worry signals possible rate hike

Pretoria - The South African Reserve Bank said on Tuesday it is concerned about upside risks to inflation and may need to take "appropriate action" if there is a significant risk to the medium-term outlook, a sign it may consider a rate hike.

In its November monetary policy review, the central bank also reiterated its stance of non-intervention in the foreign currency market to influence the rand exchange rate.

The bank's monetary policy committee (MPC) left the benchmark repo rate unchanged at 5% last week despite sluggish economic growth, citing risks to the inflation outlook, largely from a sharply weaker rand.

"Given a relatively volatile inflation rate driven primarily by exogenous factors and a negative output gap, the monetary policy stance strikes an appropriate balance between the risk of higher inflation and support for the domestic economic recovery," the bank said.

"The longer-term inflation path remains close to 6% with the balance of risks to the central projection being viewed as being to the upside."

The rand has fallen about 20% against the dollar this year, weighed down by negative sentiment over strikes that have hit manufacturing and mining output, and expectations of a sell-off of emerging markets once the US Federal Reserve starts scaling back its stimulus.

"There is no particular level of the exchange rate that would trigger a monetary policy response by the MPC," the Reserve Bank said.