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South Africa: inflation fades as economic woes loom larger

         Date: 2012-07-23

           Tag: South Africa, South Africa economic

Summary: So, South Africa's monetary policy makers have finally bitten the bullet and cut interest rates by 50 basis points, surprising the vast majority of analysts and highlighting concerns about the growt…

So, South Africa’s monetary policy makers have finally bitten the bullet and cut interest rates by 50 basis points, surprising the vast majority of analysts and highlighting concerns about the growth prospects in Africa’s largest economy.

For months now economists have been talking about the delicate balance act being performed by the South African Reserve Bank: weighing up inflationary pressures versus against a gloomy growth outlook.
At times commentators raised the possibility of a rate cut as the effects of the eurozone crisis swept across South Africa’s shores. But those believing it would happen any time soon were in a minority.

Only two of 18 economists surveyed by Bloomberg ahead of Thursday’s monetary policy committee meeting predicted a cut. Yet governor Gill Marcus said the repurchase rate would fall – for the first time since November 2010 – from 5.5 per cent to 5 per cent.

Inflationary pressures, it would seem, have been superseded by gloom over growth, not least because a third of South Africa’s manufactured exports go to Europe. Marcus said in a statement:

She acknowledged that the rate cut would not overcome the challenges facing the economy, but “it is felt that it can help alleviate some of the pressures faced by some sectors.”

It is also true that inflation has been easing. The consumer price index in urban areas fell to 5.5 per cent in June from 5.7 per cent the previous month. Marcus said inflation would continue to fall and was expected to reach a low of 4.9 per cent in the second quarter of 2013.

And in cutting rates, South Africa is catching up with others it has lagged, such as China, Brazil, India and European nations, that have been slicing rates as the global outlook has deteriorated.

But the eurozone crisis is only part of the story behind South Africa’s outlook. Business confidence in the country is depressed and policy uncertainty has dampened investment sentiment.

That is unlikely to clear up this year, as the governing African National Congress, which is riddled by factionalism, gears up for an elective conference in December.

The economy is at least enjoying positive growth. It is forecast to expand by around 2.7 per cent this year. The problem is, that is far below what’s required. The Treasury says around 7 per cent growth is needed to address unemployment of 25 per cent, poverty and inequality.

And now the first cut has been taken, economists believe more could follow. Here’s the views of Annabel Bishop, economist at Investec Group.


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