PRETORIA, June 25 (Reuters) - South Africa's central bank left its repo rate unchanged at 7.5 percent on Thursday, with concerns about inflation overriding worries about a faltering economy.

The decision follows 450 basis points in cuts since December aimed at boosting growth and pulling the economy out of its first recession in nearly two decades.

Below is some of the text of the South African central bank's monetary policy statement on Thursday.

INTRODUCTION

The domestic economy continues to show signs of stress in the wake of the global economic downturn. Output growth remains negative while trends in household consumption expenditure have continued to deteriorate. There are however signs that the downturn, both globally and domestically, may be nearing the lower turning point, but the recovery is expected to be slow and protracted.

The inflation rate has continued its downward trend which has been constrained by relatively sticky services price inflation. While the widening output gap and weak domestic demand pose a downside risk to the inflation outlook, these risks are being increasingly offset by various cost-push and exogenous factors that are impacting on the economy, as well as by deteriorating inflation expectations.

RECENT DEVELOPMENTS IN INFLATION

The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas declined from 8.4 per cent in April 2009 to 8.0 per cent in May. Food price inflation declined from 13.6 per cent in April to 12.1 per cent in May but remains the main contributor to the inflation outcome, having contributed 1.9 percentage points. Housing and utilities inflation contributed 1.8 percentage points, mainly as a result of the 29.6 per cent increase in electricity prices and the 15.1 per cent increase in the cost of maintenance and repairs.

Producer prices declined at a year-on-year rate of 3 per cent in May 2009. Nonetheless agricultural product prices increased at a year-on-year rate of 1.5 per cent, while manufactured food product prices increased by 6.2 per cent.

OUTLOOK FOR INFLATION

The most recent CPI inflation forecast by the staff of the South African Reserve Bank shows that CPI inflation is still expected to continue its moderate downward trend and to enter the target range during the second quarter of 2010, and to remain within the target range for the rest of the forecast period ending 2011. A more favourable exchange rate assumption has been offset by higher expected petrol price increases and higher-than-expected inflation outcomes.

Inflation expectations, as measured by the Bureau for Economic Research (BER) at Stellenbosch University deteriorated during the second quarter of 2009. Average inflation expectations increased from 6.1 per cent in the first quarter to 6.9 per cent in the second quarter, mainly as a result of upward revisions by financial analysts. While a downward trend for the subsequent two years remains, only the financial analysts predict inflation to be within the inflation target range in the coming two years. Overall, CPI inflation is expected to average 8.1 per cent and 7.9 per cent in 2010 and 2011 respectively.

The growth prospects for the economy remain a downside risk to the inflation outlook. The output gap, which is the difference between actual and potential output growth, has widened over the past few quarters.

The outlook for the global economy remains uncertain, but there is a general sense of cautious optimism that the lower turning point of the cycle might have been reached. The general view appears to be that the global economy will remain under pressure for most of this year before beginning a slow recovery. Global inflation remains well contained.

Household consumption expenditure is expected to remain constrained by tighter credit criteria of banks and negative wealth effects. The various house price indicators all show that house prices have continued to decline. The all-share index on the JSE Limited has recovered somewhat from its lows in March, but is still substantially below the levels recorded during the first half of 2008.

Growth in expenditure may also be affected negatively by the adverse trends in employment growth. According to the Quarterly Employment Survey of Statistics South Africa, 179,000 jobs were lost in the formal non-agricultural sector during the first quarter of 2009.

The main upside risk to the inflation outlook comes from cost-push pressures, in particular from electricity price increases and other administered prices, as well as nominal wage increases which have generally been in excess of inflation. In the first quarter of 2009, the increase in unit labour cost over four quarters amounted to 11.2 per cent.

MONETARY POLICY STANCE

The Monetary Policy Committee has decided to keep the repurchase rate unchanged at 7.5 per cent per annum. This decision is based on the economic and inflation analysis provided above. The Committee is fully cognisant of the fact that there has been significant monetary accommodation since December 2008. The MPC remains fully committed to its mandate of achieving and maintaining price stability.

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