South African rate hike unlikely next month as inflation slows

JOHANNESBURG (Reuters) - South Africa's headline consumer inflation unexpectedly slowed in May, adding to recent data that could prompt the central bank to keep interest rates on hold at its policy meeting next month. The Reserve Bank has raised the key repo rate by a cumulative 75 basis points so far this year, continuing a tightening cycle which started in early 2014 to rein in inflationary pressures. It has however kept rates on hold at its last two meetings despite inflation persisting above a 3-6 percent target band, inhibited by sluggish growth in Africa's most industrialised country, which it expects to be just 0.6 percent in 2016. Statistics South Africa said on Wednesday that CPI was at 6.1 percent year-on-year in May, just slightly above the target, compared with 6.2 percent in April, backing the case for the central bank to hold rates at 7 percent at its meeting in July. Month-on-month inflation also braked to 0.2 percent compared with 0.8 percent in the previous month. Core inflation, which excludes the prices of food, non-alcoholic beverages, petrol and energy and is also closely monitored by the bank, was unchanged at 5.5 percent year-on-year. Economists polled by Reuters expected headline CPI to quicken to 6.4 percent year-on-year in May. "The weaker-than-expected South African inflation reading for May ... will provide welcome relief for the Reserve Bank," Capital Economics senior emerging markets analyst William Jackson said. "Further ahead, if we’re right in thinking that inflation will stay above target and the economy will eke out some positive growth, additional rate hikes are likely by the end of this year." Policymakers are keen to avert a technical recession - two consecutive quarters of contraction - after the economy shrunk by 1.2 percent in the first three months of the year due to weakening output in the key mining and agriculture sectors. The rand held largely stable against the dollar after the data, with investors mainly focused on Thursday's referendum on whether Britain should stay in the European Union. (Reporting by Stella Mapenzauswa; Editing by James Macharia)