Mboweni's credibility in doubt

The decision - predicted by only 4 of 22 economists polled by Reuters last week - extends a monetary tightening cycle that has taken the key lending rate to a 5-year high and to 500 basis points increases since June 2006.

Eighteen economists had forecast a 100 basis point rise after hawkish comments from central bank governor Tito Mboweni last month, when he warned of drastic measures to tame inflation.

"While this move might make sense from a real economy perspective, markets are not going to like this at all," Razia Khan, head of research for Standard Chartered, said.

"Doubts about the credibility of South Africa's inflation targeting framework may also resurface, with market participants wondering if union opposition had anything to do with the decision."

Mboweni denied that the policy committee had been swayed by a threat from Cosatu of extended strikes should he announce a rate rise.

Mboweni said the outlook for inflation had worsened since the last policy meeting in April but noted concern around slowing growth.

"In light of the further deterioration in the inflation outlook ... the monetary policy committee has decided that at this stage further tightening of monetary policy is warranted," he said in a televised statement.

"(But) there is a concern that the economy is slowing down, we are concerned that the load-shedding (power cuts) that we go through from time to time does have a negative impact on the economy," he added in a later interview with broadcaster SABC.

Mboweni said the outlook for inflation was bleak, with risks firmly on the upside. These emanated from higher food and fuel costs, an expected rise in electricity prices and a weaker rand.

Power cuts

CPIX inflation was now seen peaking at around 12% in the third quarter of 2008, and would only return to the 3% to 6% target range by the third quarter of 2010.

However, a bigger-than-inflation electricity tariff increase had not been factored in, he warned.

Eskom is battling to meet demand for electricity, resulting in costly blackouts, and has asked for a 53% real price increase. The energy regulator is unlikely to give the full request when it decides next week.

Mboweni added that the rand remained vulnerable to perceptions of a further deterioration in the country's ailing current account, predicting a deficit of "plus or minus" 9% of GDP for the first quarter from 7.5% in the final quarter of 2007.

While inflation remained the primary focus for the central bank, he noted household spending was responding to previous rate increases and that economic growth was easing.

South African consumers are struggling under rising debt, and are cutting back sharply on spending, hitting new motor vehicle and retail sales, and leading to a fall in house prices.

Confidence measures are at multi-year lows, while economic growth cooled to a 6-1/2 year low of 2.1% in the first quarter of 2008, knocked by the power crisis.

- Reuters