South Africa central bank slashes growth forecast, holds rates

South Africa's Reserve Bank slashed its growth forecast for this year and kept rates on hold Thursday, warning a prolonged mining strike could have a further "potentially devastating" impact on the economy. Painting a bleak picture of the state of Africa's most developed economy, Gill Marcus said growth was expected to slow to 2.1 percent this year, versus a previous forecast of 2.6 percent. "Despite a more favourable global growth environment, the domestic economic growth outlook has deteriorated markedly," said Marcus. She zeroed-in on a strike that has kept an estimated 80,000 platinum miners above ground for the last four months, refusing to return to work until they get a significant pay hike. "There is still no end in sight to the protracted strike in the platinum sector, and the economic and social costs are escalating and are potentially devastating," said Marcus. She also expressed concern that any bumper wage deal in the sector could set the tone for other salary negotiations -- fuelling inflation that is already above the six percent upper edge of the bank's target rate. At an annualised rate consumer prices rose 6.1 percent in April thanks to a rise in the cost of basic food items, housing and transport. That poses a tough challenge for the bank. It needs to curb inflation -- which has hit the poor disproportionately hard -- but raising interest rates risks hampering growth. With one in four South African workers without a job and millions more giving up the hunt, the country sees frequent social unrest. - 'Tough times' - It's obviously not good for the consumer to be staring down the barrel of 6.1 percent of inflation," said Ryan Wibberley, head of equity dealing in emerging markets at Investec Asset Management "For the average guy on the street, you know these are tough times," he said, speaking from Cape Town. Marcus said members of the monetary policy committee had decided to keep rates on hold for now, with five members voting in favour of a freeze and two voting for a rise. "Monetary policy faces an increasingly challenging scenario," said Marcus. High inflation and a weak rand had forced the bank to raise rates by half a percentage point in January to 5.5 percent. The decision not to raise rates this time round had been expected. But Marcus cautioned "the committee continues to hold the view that we are in a rising interest rate cycle." Nedbank chief economist Dennis Dykes predicted the bank's interest rate hikes will be a "very slow climb instead of a quick one." "Of course if the rand continues to firm they'll hold off," he said, "if the rand gets weaker and they get more worried about inflation, they'll push the button." Dykes said the platinum strikes have had a "horrible" impact on the country's economic outlook. "We thought we'd get over two and a half percent this year, yet the platinum strike has wiped out any base effects you would have normally seen," he said. "Every year we say it's abnormal factors pushing us lower, but it's starting to look normal," he said, "it's a big ideological struggle and it's going to have a very painful outcome. It's just not economically viable, there's not going to be a miracle."