The South African Reserve Bank (SARB) decided on Thursday (July 18) to keep its key repo rate unchanged at 5%, in line with market expectations, saying that the upside risks to the inflation outlook reduce the scope for further accommodation despite the sluggish economy.

The central bank said that while headline inflation eased to 5.6% in May from 5.9% in the previous three months, the decline is likely to have been temporary, as it came as a result of a decline in petrol prices, which has since grown again.

Moreover, the central bank raised its inflation outlook to an average rate of 5.9% for this year from previously expected 5.8%, to 5.5% for next year from previously expected 5.2% and to 5.2% for 2015 from previously expected 5%.

It expects inflation to temporarily breach the upper end of its 3%-6% target range in Q3 2013, reaching 6.3%, up from previously expected 6.1%.

The bank said it had to raise inflation outlook mainly due to continued currency weakness and higher-than-expected petrol price increases, adding that the main upside risk to the outlook is the exchange rate, as much will depend on the strength of the pass-through to inflation, which to date has been relatively muted.

The central bank also cut its outlook for the domestic economic growth in 2013 to 2% from previously expected 2.4% due to the lower than expected 0.9% growth in Q1 2013. The 2014 growth forecast was lowered to 3.3% from 3.5% and the 2015 projection was revised down to 3.6% from 3.8%. The bank noted that the risks to the outlook remain on the downside, particularly in the face of further delays in overcoming electricity supply constraints.

In July 2012, SARB cut by 50bps the repo rate, which had been staying flat at 5.5% since November 2010, in a bid to counteract downside risks posed to the domestic economy from weakening global environment, while inflation was seen within target for an extended period.