By Stella Mapenzauswa
PRETORIA, July 18 (Reuters) - South Africa's Reserve Bank kept rates on hold as expected on Thursday, constrained from giving further stimulus to the struggling economy due to inflationary pressures stemming mainly from the weaker rand.
South Africa's monetary policymakers, like others across the emerging world, are also under pressure to keep interest rates attractive for investors in the event the United States starts withdrawing asset purchases that have pumped billions of cheap dollars into the system.
Global uncertainty about when the U.S. Federal Reserve will start to cut back its monthly asset purchases had triggered a heavy sell-off in emerging market bonds, piling pressure on currencies, Governor Gill Marcus told a news conference.
'These events had a significant impact on the exchange rate of the rand, creating further upside risks to the inflation outlook at a time when the domestic economy has shown increased signs of vulnerability,' she said.
'There has consequently been no let-up in the policy dilemma faced by monetary policy: that of a widening output gap in a worsening inflation environment,' Marcus added, keeping the benchmark repo rate at a 40-year low of 5 percent.
All of the 22 economists surveyed by Reuters last week predicted the call, with the majority seeing rates unchanged for the rest of this year.
The central bank revised its inflation outlook for 2013 and 2014 slightly higher to 5.9 percent and 5.5 percent respectively, and saw a temporary breach of the 3-6 percent target band in the third quarter of this year.
The outlook for domestic economic growth had weakened further, with expansion this year now seen at 2.0 percent from the 2.4 percent projected in May, it said. The Treasury expects growth of 2.7 percent for Africa's biggest economy.
'The Reserve Bank is still going to be mindful of inflation but it is going to be the preoccupation with preserving GDP growth that is going to keep the window to cut interest rates somewhat open,' said economist Colen Garrow of Meganomics.
'It would be premature to dismiss further rate cuts from happening but the decision today is pretty much in line with what the market is thinking.'
The rand weakened to 9.9125 per dollar by 1541 GMT, from 9.8700 before Marcus began her speech, largely reflecting broad-based dollar strength. It was down nearly 1 percent on the day.
The yield on the benchmark 2026 government bond was 4 basis points higher from Wednesday's levels at 7.855 percent from 7.825 percent before the central bank conference.
The central bank has not adjusted the repo rate since a 50 basis point cut a year ago, despite growth languishing below 3 percent from an average 5 percent before a recession in 2008/2009.
The bank's hands have mainly been tied by a steep fall in the local currency, down about 20 percent against the dollar since the start of the year, partly as investors fret about the impact of mining labour strife that has slowed the production of commodities for export.
Domestic rates have already slipped into negative territory in real terms, with inflation currently hovering at around 5.4 percent.
'While financial markets have stabilised somewhat, the risks posed to emerging economies in general, including South Africa, by normalisation of monetary policy in the U.S. in the future, are evident,' Marcus said.
(Additional reporting by Johannesburg newsroom; Editing by Jon Herskovitz) Keywords: SAFRICA RATES/
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