South African central bank chief kept interest rates unchanged on Thursday, despite higher food and oil prices posing a risk of higher inflation.

Reserve Bank Governor Tito Mboweni announced the decision of the monetary policy committee (MPC) not to alter the seven percent repo rate at which the central bank lends money to commercial banks.

Mboweni said inflation was now expected to follow a moderately rising trend. "According to the central forecast, CPIX inflation is expected to peak at around 4.9 percent in the first quarter of 2007 whereafter it is expected to decline slowly to reach around 4. 7 percent at the end of the forecast period (calendar 2007)."

Oil and food price developments were potential inflation risks. Food price inflation was expected to be higher in 2006 than 2005, according to the central bank.

"We will sit tight, grind our teeth and hope that these factors will work themselves out. If however these track down effect become generalized we as the MPC will react to that," Mboweni said.

"The higher food price inflation is evident in production prices. Along with higher maize prices (these) also point to a possible acceleration in retail food price inflation going forward. "

Robust domestic demand was also highlighted as a factor which could negatively affect the inflation outcome.

Household consumption expenditure remained strong, and new vehicle sales reached an all time high in December. They increased by 25.7 percent over the year as a whole.

The strong domestic demand was underpinned by the growth in credit extension, with total loans and advances in the private sector growing around 20 percent year-on-year during October and November, reaching 21.4 percent in December 2005.

There were a number of factors that were positive for low inflation. These included continued fiscal discipline, low world inflation, and well-anchored inflation expectations.

Source: Xinhua