South Africa's monetary policy had to continue its role of stabilising output at high but non-inflationary levels, Monde Mnyande, central bank chief economist and adviser to the governor, said yesterday.

The South African Reserve Bank will be making its rates decision next Thursday, when it is widely expected to cut the repo rate further from 6.5% to help stimulate a stuttering recovery after last year's recession, the first since 1992.

Economic growth slowed to 3.2% in the second quarter, hit by a contraction in mining and a slowdown in manufacturing.

The economy is expected to grow by about 3% this year and average about that over the next three years, far below levels needed to create jobs.

Inflation, which the central bank targets in a 3%-6% band, has slowed to a four-year low of 3.7%, and is expected to remain within target range until the end of 2012.

Slower growth levels and easing inflation have spurred calls for the central bank to add to its 5.5% points' worth of reductions between December 2008 and March 2010.

Mnyande also said in the speech posted on the bank's website that lower economic growth outcomes and higher fiscal deficits posed significant risks to the government debt outlook, and could be viewed as negative for savings.

The Treasury has said it expects its debt to GDP ratio to peak at about 44% in 2015-16, before declining.

The public servants' rejection of a higher government pay offer in favour of continuing a strike now in its third week may hit the government's plans to decrease its borrowing. The government's pay bill, already a third of total expenditure, could swell even further, making it difficult for government to cut its fiscal deficit to 4% of GDP by 2013, from 6.7% in 2009-10.

"The avoidance of large budget deficits by government will be conducive to prudent savings behaviour," said Mnyande.