South Africa's central bank left its key interest rate unchanged for the fifth consecutive session on Thursday as expected.

The Monetary Policy Committee (MPC) of the South African Reserve Bank maintained the repurchase rate steady at 5.5 percent. "The MPC is however concerned at the potential impact of the current global turmoil on domestic economic prospects and stands ready to act appropriately should the need arise," Governor Gill Marcus said in a statement.

While there are some changes to the MPC's assessment of the risks to the inflation outlook, inflation expectations appear to be relatively well anchored, Marcus said. Overall risks to the inflation outlook are assessed to be delicately balanced, she added. The upside risk to the inflation outlook from a weaker rand is 'relatively moderate', but rising, the central bank said.

The recent volatility in the rand exchange rate has imparted a degree of upside risk to the inflation forecast, while downside risks are expected to emerge from the heightened risks to global growth and its consequences for the domestic economy, the central bank said.

Emerging market economies are unlikely to emerge unscathed from the challenging environment, though they are expected to continue growing, Marcus said. They remain vulnerable to contagion effects from a possible significant slowdown or recession in the advanced economies, she warned. According to her, the combination of declining growth and rising inflation poses a challenge to monetary policy going forward.

The SARB expects food price inflation to accelerate further in the coming months. However, core inflation trends are seen 'relatively well contained'. "Inflation is still expected to breach marginally the upper end of the target range in the final quarter of 2011 and to peak in the first quarter of 2012 at around 6.2 percent before returning to within the target range in the second quarter," Marcus said.

"Inflation is then expected to decline gradually and to measure 5.5 percent in the final quarter of 2013." The central bank expects core inflation, which excludes food, petrol and electricity, to peak at around 5.1 percent in the second and third quarters of 2013.

Citing a lower-than-expected outcome in the second quarter and downgrades to global growth outlook, the central bank lowered its forecast for average growth in 2011 to 3.2 percent from 3.7 percent. The projection for next year was cut to 3.6 percent from 3.9 percent, while the forecast for 2013 was kept unchanged at 4.4 percent. The risks to this outlook are seen to be on the downside, the bank said.

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