Cape Town. 100219. South Africa is coming out of its first recession in almost two decades reasonably rapidly, says Reserve Bank Governor Gill Marcus. Marcus also said monetary policy remains directed towards containing inflation. The central bank has cut rates by 500 basis points since December 2008, and left the repo rate flat at 7,0% at its last four meetings. Picture Mxolisi Madela

Johannesburg - South African interest rates will stay put at 5 percent until at least the second quarter of next year, when the central bank will likely begin a tightening cycle, a Reuters poll showed on Friday.

The repurchase rate in Africa's largest economy, at which the South African Reserve Bank (SARB) lends to commercial banks, is at 40-year lows and was last changed in July 2012 with a 50 basis point reduction.

The SARB is expected to maintain that stance at its fifth policy meeting of the year on Thursday, according to the consensus forecast of 25 economists polled by Reuters.

The bank faces a policy dilemma; how to loosen policy to support weak growth while inflation is above target.

The decision comes against the backdrop of a rout across emerging markets on expectation the US Federal Reserve will reduce a stimulus that had fuelled riskier assets such as South Africa's rand currency.

Local labour tensions, although not as destabilising as some feared this year, also could instil caution in policymakers.

The SARB targets 3-6 percent for CPI, which breached that band at 6.3 percent year-on-year in July. This was, however, expected by the Bank which has now become more tolerant of inflation at the upper end of the band.

At its last policy-setting meeting in July, the bank said despite a higher trend in core inflation, there were no strong signs of excess demand pressures, and the breach in headline CPI could be short-lived.

However the local rand currency has since plunged to 10.5100/dollar, with scope for further losses, raising the spectre of worse-than-anticipated import price pressures.

Some analysts predict that core inflation will breach 6 percent next year and the headline number will remain above the target band for a stretch of time.

Core inflation rose to 5.3 percent in May from 5.2 percent the previous month.

South Africa has not been spared in the emerging market sell-off where investors are pre-emptively selling risky assets in anticipation of the Fed reducing its monthly bond purchases.

“The change in the Fed's stance has altered the backdrop for capital flows. Given the large current account deficit, the absence of robust capital inflows could prevent the rand from recovering notably, which will prevent rate cuts,” said Carmen Nel, an economist at Rand Merchant Bank.

South Africa is running a current account shortfall of 6.5 percent of GDP. The gap has historically been funded by portfolio inflows, but the central bank has conceded that financing the account is no longer as easy as it used to be.

Strikes in leading sectors such as manufacturing and mining have also rattled confidence in Africa's largest economy during a wage negotiation period known locally as “the annual strike season”.

Economists say the Reserve Bank has little room to cut rates, with the next move expected to be an increase next year to combat inflation and as global growth gradually picks up, boosting the domestic economy.

“The SARB are challenged by both growth and inflation and given that the core mandate of the central bank is price stability, lower interest rates could lead to a softer rand and higher inflation,” said Anisha Arora of 4 Cast.

“This may ultimately see workers demand even higher wages hikes to meet the erosion of purchasing power. The best option on the table is to keep monetary policy stable and we don't expect the SARB will move rates from 5.00 percent well into Q2014.” - Reuters