* Marcus says domestic economic recovery remains fragile
* Scope for further downward movement limited
* Says outlook for inflation has improved
(Adds COSATU reaction)
By Stella Mapenzauswa
JOHANNESBURG, Nov 18 (Reuters) - South Africa's Reserve Bank cut its repo rate by 50 basis points as expected on Thursday, saying the outlook for domestic inflation had improved while the economy was still struggling and the rand remained strong.
Governor Gill Marcus said the scope for monetary easing was limited, but Thursday's cut, which leaves the repo rate at a historical low of 5.5 percent, may not be the bottom of the interest rate cutting cycle.
The move adds to 600 basis points of reductions in interest rates since December 2008, partly aimed at boosting economic growth after Africa's biggest economy suffered its first recession in two decades last year.
"Since the previous meeting of the Monetary Policy Committee (MPC), the outlook for domestic inflation has improved further against the backdrop of a continued negative domestic output gap and sustained strength in the exchange rate of the rand," Marcus told a press conference.
Marcus said inflation, which slowed to 3.2 percent year-on-year in September, was expected to average 4.3 percent for 2010 and 2011, before accelerating to 4.8 per cent in 2012, but still within the central bank's 3-6 percent target range.
The main risks to the inflation outlook continued to emanate from cost-push factors, including wage trends and administered prices, while food and petrol prices were also identified as potential longer term risks.
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For a graphic on the repo rate and targeted inflation:
http://r.reuters.com/rub26q
For analysts' comments on the rate cut, click
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Marcus said the rand had appreciated by over 3 percent against the U.S. dollar since the last policy meeting and was "more or less unchanged on a trade-weighted basis".
The rand has gained 26 percent against the dollar since the start of 2009 -- raising concerns within government, the central bank and labour that this was hurting the economy in general and the key manufacturing sector in particular.
LABOUR WANTS BIGGER CUTS
Labour federation COSATU, a powerful government ally, welcomed the cut, but said reductions so far had been "much too small and too slow, given the continuing rise in unemployment, the sluggish growth of the economy and the high levels of poverty and inequality".
"COSATU demands that the commercial banks heed the call by the SARB Governor ... to pass on the full interest rate reduction to their customers," it said in a statement.
Marcus said persistently low growth in the United States and renewed quantitative easing, combined with renewed concerns about the solvency of some euro area countries, would prolong the current environment of low global interest rates and continued capital flows to emerging market economies.
"The recent observed volatility in the bilateral rand exchange rates has been mainly as a result of the volatility in the euro/dollar exchange rate. From a policy perspective, focus is maintained on the trade-weighted exchange rate," she said.
The rand was last at 7.0023 against the dollar from 6.9630 just before Marcus announced the cut. The yield on the benchmark 2015 bond was at 7.015 percent -- down 12 basis points on the day -- from 7.08 percent beforehand.
Marcus said the domestic economic recovery remained fragile after last year's downturn, with adverse global developments making the outlook more uncertain.
"The MPC believes that while monetary policy cannot determine the long term growth path of the economy, it can impact on cyclical deviations of output from potential output," she said.
"The view of the MPC is that there is room for further stimulus, given the weakness in the supply side of the economy."
Marcus said the action was consistent with the continued attainment of the inflation target but the scope for further downward movement was limited "given the signs of recovery in household consumption expenditure and credit extension".
Analysts polled by Reuters last week saw a 60 percent probability of a rate reduction, with 16 of 21 economists surveyed predicting the Reserve Bank would cut the repo rate by 50 basis points to 5.5 percent.
"I think there is possibly room still to ease. In my mind the door has been left open somewhat, just by the comment that any further movement will be motivated by the economic stats as they come out," said Brait economist Colen Garrow. (Additional reporting by Johannesburg newsroom: Editing by Ron Askew)