November 23, 2017 / 2:01 PM / a year ago

UPDATE 2-South Africa holds repo rate, says inflation risks rising

* Bank keeps benchmark repo rate at 6.75 percent

* New forecasting model implies two rate increases by 2019

* Downgrades, public spats in ruling party a risk

* Consumer and business confidence remain low - governor (Adds quotes, analyst, details)

By Olivia Kumwenda-Mtambo and Alexander Winning

PRETORIA, Nov 23 (Reuters) - South Africa’s central bank kept its benchmark repo rate at 6.75 percent on Thursday, citing the increased risks of inflation posed by currency weakness, possible credit downgrades and political jostling.

The bank’s forecasting model implies three rate increases of 25 basis points each by 2019, Governor Lesetja Kganyago said, but “this does not mean an unconditional commitment to change policy rates in-line with this path”.

On Wednesday, forward markets were already pencilling in 25 basis point hike by the first quarter of 2018.

“The tone of today’s meeting was notably more hawkish,” said William Jackson, a senior analyst at Capital Economics .

“Though, with inflation set to remain within the SARB’s target range and growth still soft, we find it unlikely that the SARB will deliver the rate hikes the markets are now pricing in over the coming months,” Jackson said.

The bank kept its inflation forecast for 2017 at 5.3 percent but raised its forecasts for 2018 and 2019, citing the weaker exchange rate and rising global oil prices.

“The lead-up to the African National Congress national elective conference and its uncertain outcome is also likely to continue to weigh on the currency,” Kganyago said, referring to the ruling party’s conference in December to elect a successor to President Jacob Zuma as its head.

S&P Global Ratings and Moody’s are set to review their ratings of South African debt on Friday, with a one-notch cut of the local-currency rating by both agencies likely to trigger forced selling of up to $12 billion of the country’s bonds.

“Downgrades of domestic currency debt to sub-investment grade could lead to South African government bonds falling out of key indices which require investment grade. Such an event could trigger significant sales of domestic bonds by non-residents,” Kganyago told a media conference.

Thirteen of 25 economists surveyed on Monday said either S&P Global Ratings or Moody’s was likely to cut the local currency rating to junk on Friday. Fitch has already downgraded South Africa to junk status. If both S&P and Moody’s cut local currency ratings below investment grade, South Africa will be ejected from Citi’s World Government Bond Index.

The scope for rate cuts was limited, Kganyago said, by the weak fiscal forecasts in the national budget announced in October, which forecast a widening deficit and rising government debt.

The bank said it foresaw 2017 growth at 0.7 percent, up from 0.6 percent seen in September. But it reduced forecasts for 2018 to 1.2 percent and for 2019 to 1.5 percent.

“Both consumer and business confidence remain low and are also likely to be affected by political developments in December,” Kganyago said. (Writing by Mfuneko Toyana; Editing by James Macharia, Larry King)

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