Interest rate hikes later this year now look very unlikely, given the tone and content of the Reserve Bank's monetary policy announcement last week.

Most economists have been slow to alter their prevailing view that the Bank is likely to raise its 5.5 percent repo rate at its policy meeting in November, to curb rising inflation. But local money markets are pricing in only a 50-50 chance of interest rates rising in four months.

They are betting on a 75 percent chance of a rate hike in January next year, and a 100 percent likelihood in March. The latest statement from the Bank's monetary policy committee (MPC) backs those expectations, which differ from those after the May decision to keep interest rates on hold.

The MPC said in May that there were "elevated risks" that external price shocks from food and fuel could ultimately feed through to more "generalised inflation". Last week, it said that although its inflation forecasts had been revised slightly higher in the near term, there were several "downside risks".

It said the risks were seen to be "delicately balanced" and highlighted the threat which SA's economy faced from fallout from the debt crisis in Europe and the US. "Compared with the May MPC meeting and subsequent global and domestic economic developments, the probability of an earlier rate hike has faded," said Investec Capital Markets economist Tertia Jacobs on Friday.

"The Reserve Bank has adopted a more pragmatic approach." The Bank's mandate is to keep inflation inside a 3 percent-6 percent official target range. But it also takes factors such as growth and employment into account when it makes interest rate decisions, and scrutinises what happens elsewhere in the economy.

Last week, the Bank dwelt on an expected slowdown in growth in the second quarter of this year. It pointed out that momentum in household spending, the economy's main engine, may be levelling off. It also said demand was not sparking any obvious inflation pressures.

The Bank noted a downturn in business confidence in the second quarter, and slow growth in both investment and credit extension. At the same time, the MPC appeared to shift focus towards core inflation, a measure which excludes food, petrol and electricity — the main drivers of inflation at present.

The headline measure of consumer inflation is now expected to breach the upper end of its target in both the fourth quarter of this year and the first quarter of next year. In normal circumstances, that would prompt an inflation-fighting central bank to raise rates.

However, the Bank describes the economy as "fragile" and is concerned about fallout from the debt crisis in Europe, South Africa's main trade bloc partner. The MPC pointed out that core inflation reached just 3.2 percent in May and 3.5 percent last month.

It forecast the measure would "show a moderately rising trend" and peak at five percent in the second quarter of next year. "What seems to be much more important is if core inflation breaches its target," said Nomura International economist Peter Attard Montalto.

He said his forecast of a November rate hike now looked "untenable" and he now expected a hike next March. Another factor to watch is inflation expectations. A key survey from the Bureau for Economic Research suggests inflation will stay inside its target range through to 2013.

The Bank's deputy governor, Daniel Mminele, said this factor was key when judging how long inflation might stay outside its target range.