Sarb: Rates must go up at some point

Johannesburg - The South African Reserve Bank left interest rates unchanged as expected on Thursday, citing a lower inflation trajectory and continued weakness in the economy, but said rates would still have to go up eventually.

After keeping the benchmark repo rate unchanged at 5.75%, new governor Lesetja Kganyago said future increases would depend on domestic inflation expectations, the speed of interest rate rises in the United States and the state of the local economy.

"The domestic growth outlook remains challenging and the risks to the forecast are assessed to be moderately on the downside," Kganyago, who was deputy governor before taking over from Gill Marcus on November 9, told a news conference.

"The MPC does not see significant signs of excess demand pressures that are impacting on the inflation outlook," he said.

However, he stressed that the reserve bank would remain "vigilant" and keep a close eye on economic developments.

"The Committee remains of the view that interest rates will have to normalise over time," Kganyago said.

The rand weakened immediately after the decision, but then recovered ground to 10.9500 by 14:53 GMT. The yield on the benchmark 2026 government bond fell to a year-low of 7.765%.

Seventeen of the 30 economists polled by Reuters last week had expected interest rates to stay unchanged.

The rest said the South African Reserve Bank would hike by 25 basis points at its sixth and final policy meeting of 2014, adding to 75 basis points of increases earlier in the year.

All six committee members voted in favour of holding rates steady on Thursday.

"The policy guidance is clear – for now, there is no immediate reason to tighten further," Standard Chartered analyst Razia Khan said.

Kganyago said the mining and manufacturing sectors should improve after they were hit by strikes earlier in the year, but domestic structural constraints would inhibit economic expansion.

He cut the central bank's 2014 GDP growth forecast to 1.4% from 1.5%, and said inflation would average 6.1 percent for the year, compared with the 6.2% seen previously.

Inflation would then average 5.3% next year, well within the bank's 3-6% target band, he added.

But Kganyago said the rand exchange rate and possible above-inflation local wage settlements posed a risk to the outlook.

READ: Rates announcement and reactions