September 20, 2018 / 1:39 PM / a month ago

UPDATE 4-Split South African central bank holds rates, exposing wider tensions

* Four of MPC voted for no change, 3 for a hike

* Bank facing dilemma of high inflation, low growth

* ANC criticises decision, then retracts statement

* Bank cuts 2018 growth forecast to 0.7 pct (Recasts, adds ANC retracting comments on monetary policy)

By Olivia Kumwenda-Mtambo and Mfuneko Toyana

PRETORIA, Sept 20 (Reuters) - South Africa’s central bank left its benchmark repo rate at 6.5 percent on Thursday, in a decision that exposed tensions among policymakers and within the ruling party as the country seeks to nurse an ailing economy back to health.

The South African Reserve Bank (SARB) meeting was closely watched after its emerging-market peers Turkey and Russia raised their main lending rates to keep in check inflation driven higher by weakening currencies.

As well weighing risks to its inflation forecast following a more than 6 percent decline in the rand since the SARB’s last rate meeting in July, it had to take account of an economy that slipped into recession in the second quarter.

In an illustration of that dilemma, four members of the Monetary Policy Committee voted for no change in rates and three for a 25-basis-point increase, while the bank’s governor struck a more hawkish note than at the previous meeting.

“Risks to the inflation outlook have continued to materialise,” Lesetja Kganyago told a news conference in Pretoria, adding there was no discussion about a rate cut.

The central bank cut its growth forecast for this year to 0.7 percent from the 1.2 percent it predicted in July, and a hike would have dealt a further blow to the economic outlook.

POLITICIANS FOCUSED ON GROWTH

In Turkey, President Tayyip Erdogan has put repeated pressure on the central bank to cut rates despite double-digit inflation, and leading political figures in Moscow also lobbied for an easing of monetary policy.

Thursday’s decision by the SARB drew a critical initial reaction from the ruling African National Congress (ANC).

Calling on the bank to help the poor, it said in a statement it believed monetary policy was critical in “driving growth, creation of jobs and reduction of the capital costs in the economy”, apparently signalling a preference for a rate cut.

The ANC is led by President Cyril Ramaphosa, who has made a pledge to revive the economy after a decade of stagnation a cornerstone of his administration.

The party later retracted the statement, saying it had been “issued without requisite consultation”, while the head of its economic transformation committee, Enoch Godongwana, told Reuters it respected the central bank’s independence and that “appropriate action” would be taken against the official who issued the statement.

STRUCTURAL CHALLENGES

The rand was little changed after Thursday’s decision, which all bar one of the 26 economists surveyed by Reuters had predicted.

Governor Kganyago said the outlook for inflation had deteriorated mainly because of the weaker rand and higher global oil prices.

He also said there was little room in the bank’s monetary policy to boost the economy beyond the new, lower growth forecast.

“The committee continues to be of the view that current challenges facing the economy are primarily structural in nature and cannot be solved by monetary policy alone,” Kganyago said, adding there was no discussion about a rate cut.

Kganyago said the SARB’s models showed the rand was undervalued at current levels around 14.45 to the dollar.

“Tighter global financial conditions and the change in investor sentiment towards emerging markets remain key external risks to the rand,” he said. “It is likely that the rand along with other emerging market currencies will remain volatile.” (Additional reporting by Nomvelo Chalumbira, writing by Alexander Winning and James Macharia; editing by John Stonestreet)

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