Growth outlook 'fragile' - Marcus

Not even growth of less than 2% this year could move the Reserve Bank yesterday to cut the interest rate.

"We do not see room for further monetary accommodation," said Reserve Bank governor Gill Marcus. This is central bank speak for "the repo rate remains unchanged".

Speaking in Pretoria, Marcus said the decision of the bank's monetary policy committee was unanimous.

The repo rate has been 5% - and the prime overdraft rate 8.5% - since July last year. Though these are the lowest rates in four decades, South Africa's growth has been feeble.

Inflation - and the forecast for next year - remains "uncomfortably close" to the upper level of the bank's target range, according to Marcus.

A few of Marcus's peers in other developing countries have increased their interest rates to hold back inflation. Brazil, India and Indonesia have all raised rates inrecent months.

But South Africa's growth is behind other developing countries, with most economists having forecast it to be slightly above 2% this year. Yesterday, the bank lowered its forecast, saying it now expects growth of only 1.9% for the year.

Marcus called the domestic growth outlook "fragile" and also lowered the forecast for next year to 3% from 3.3% and for 2015 to 3.4% from 3.6%.

"The policy dilemma is underlined by the deterioration in the growth outlook. The committee assesses the risks to be on the downside, amid continued supply disruptions and low business and consumer confidence," read the monetary policy committee's statement.

Though lacklustre growth seems reason enough to cut rates, the policy committee still believes there is a risk of "significant depreciation" of the currency.

The US Federal Reserve is set to start "tapering" its controversial policy of "quantitative easing". The Fed is pumping $85-billion a month into financial markets in the form of bond purchases and much of this money has found its way to emerging markets, which has supported currencies like the rand.

But "tapering" would lessen, and could eventually stop, this inflow. Fears that the Fed would start tapering this year have hit the rand hard and contributed to its drop to about R10.45 to the dollar, stoking the risk of higher inflation.