Cenbank should hold rates to shore up growth, IMF says

South Africa's ailing economy will at best barely grow this year and its central bank should resist the temptation to raise interest rates further, the International Monetary Fund said on Thursday.

There were also risks to its lowered outlook, it said, stemming "mainly from linkages with China, heightened global financial volatility, and domestic politics and policies that are perceived to harm confidence."

The country has been beset by political ructions, epitomised by President Jacob Zuma's decision to change finance minister twice in four days in December without explanation.

Its economy, beset by high inflation and unemployment, has also been hobbled by low commodity prices and a severe drought.

"Changes in ministerial appointments at the Treasury in December 2015 shook investor confidence, with the subsequent recovery of financial markets not fully retracing the initial sharp losses," the IMF said.

"These and subsequent political developments have kept perceived political risks and policy uncertainty high, though the strength of South Africa’s institutions has been affirmed."

The central bank, which faces a policy conundrum of rising prices allied with flagging growth, has hiked interest rates by 200 basis points since January 2014 to try to get inflation down into its target band of 3 to 6 percent.

The IMF advised the bank not to tighten policy further unless inflation expectations rose significantly.

"The impact of past policy hikes is still filtering through, and the weak economy should keep inflation contained," the IMF said.

The rand gave back some of the day's gains against the dollar after the IMF report, and was trading at 14.7290 by 1610 GMT from 14.6520 when the report came out at 1345 GMT.

The Treasury said in a statement that South Africa was more positive about its economic growth, which it forecast at 0.9 percent this year, and recognised that structural reforms were necessary to boost growth and create jobs.