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South African Reserve Bank Governor Gill Marcus speaks in Pretoria on February 11, 2012/AFP

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South Africa exchange rate unchanged amid high inflation

South African Reserve Bank Governor Gill Marcus speaks in Pretoria on February 11, 2012/AFP

South African Reserve Bank Governor Gill Marcus speaks in Pretoria on February 11, 2012/AFP

JOHANNESBURG, May 23 – The South African Reserve Bank held interest rates unchanged Thursday in the face of high inflation, while warning of major risks to already mediocre growth.

A downbeat Reserve Bank governor Gill Marcus said the main interest rate would stay at five percent, despite the bank cutting growth forecasts for the year.

The bank’s rate-setting committee, she said, “is increasingly concerned about the deteriorating outlook for the South African economy.”

“There are a number of critical domestic issues that are contributing the vulnerability of the economy that need to be urgently addressed.”

Africa’s largest economy is struggling under high inflation and slow growth which is likely to come in at a lower than expected 2.4 percent this year.

A rate cut would stimulate the economy, but could also fuel inflation.

Marcus said inflation, currently at 5.9 percent, was likely to breech the bank’s six percent-threshold in the third quarter of this year.

“They can’t cut because of a risk of higher inflation. They can’t raise the rates because growth is expected to be slightly weaker,” said Nedbank economist Isaac Matshego.

The weakness of the rand which is at its lowest level in four years is also putting pressure in prices, making imports more expensive.

“The current level of exchange rate, if sustained, poses a significant upside risk to the inflation outlook,” Marcus warned.

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Prices are being further fuelled by elevated wage demands with the powerful National Union of Mineworkers (NUM) seeking up to 60-percent pay rise for coal and gold miners.

Amid tensions between rival unions in the north of the country, President Jacob Zuma warned Thursday against illegal stoppages that regularly halt production.

“Wildcat strikes of the type happening in the mining industry and other sectors are hardly the way to advance the interests of marginalised sections of our people,” he said.

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