South Africa’s economic outlook has “deteriorated” and inflation will probably remain within the bank’s target range through 2014 as the debt crisis in Europe persists, the Reserve Bank said.
Inflation, which probably peaked in the first quarter, is on a declining trend, Reserve Bank Governor Gill Marcus told reporters in Pretoria today. Inflation reached a high of 6.3 percent in January, according to the statistics agency.
“The domestic growth outlook has also deteriorated mainly due to the global uncertainties,” Marcus said in the central bank’s annual report, released in the city. Inflation will “remain within the target range on a sustained basis over the forecast period.”
Finance Minister Pravin Gordhan has warned that the outlook for Africa’s biggest economy is worsening as manufacturing and consumer spending growth slows more than forecast. The debt crisis in Europe is eroding export demand from a region that buys about a third of South Africa’s manufactured goods.
The Reserve Bank has limited room to lower the benchmark lending rate with inflation staying near the upper end of the bank’s 3 percent to 6 percent target range, Marcus said on May 24. The inflation rate was 5.7 percent in May.
The lending rate is “supportive of the domestic economy without undermining the bank’s primary objective of price stability,” Marcus said in the report.
Weak economic growth numbers and the potential for a further material slowdown in inflation raises the possibility of an interest rate cut, Arthur Kamp, an economist at Cape Town- based Sanlam Investment Management, said by phone.
“Our view has been that interest rates would remain flat through this year certainly and, if not, through most of next year,” he said. “We also admit that given the kind of numbers that we are seeing at the moment, you cannot discount another rate cut.”
Investors have increased bets on a reduction in the benchmark rate, with forward rate agreements starting in six months dropping 50 basis points since the start of April to 5.25 percent, according to data compiled by Bloomberg.
Economic growth slowed to an annualized 2.7 percent in the first quarter from the previous three months. Retail sales contracted in the first quarter and manufacturing growth almost stalled in April. The purchasing managers’ index fell below 50 for the first time in six months in June, indicating manufacturing output shrank, Kagiso Tiso Holdings Ltd. said on July 2.
Economic conditions in Europe and the fiscal constraints in the U.S. are damping prospects for global growth, Marcus said.
Marcus, speaking at an event in Johannesburg, said the global economy is facing a situation similar to the Great Depression. The European crisis is “dire” and the region has a “rough ride” ahead, she said at a meeting hosted by the Chabad Young Achievers Forum. The Reserve Bank’s inflation-targeting framework is the “right” policy for the economy, she added.
Gordhan lowered his growth forecast for this year to 2.7 percent, while the central bank in May cut its prediction to 2.9 percent from 3 percent.
The rand’s recent slump has overtaken oil prices as the main risk to inflation, Marcus said. The currency has dropped 17 percent against the dollar in the past year, the second-worst performer among the 16 major currencies tracked by Bloomberg. The rand weakened 0.8 percent to 8.1436 against the dollar by 1 p.m. in Johannesburg. The yield on the rand bond due in 2015 fell 1 basis points to 5.96 percent.
Oil in New York has dropped 10 percent in the past year. South Africa cut the gasoline price by 7.3 percent in Gauteng province this month.
“Whereas previously oil was seen as the main upside risk to the inflation outlook, more recently the depreciation of the rand in response to global risk aversion became the main upside risk,” Marcus said.
The central bank is considering adding yuan to its foreign- currency reserves, Deputy Governor Daniel Mminele told reporters in Pretoria.
“We are considering it as part of of the overall review given the growing links of trade with South Africa and China,” he said. “It is important we give that some consideration.”
The bank holds 52 percent of its assets in dollars and 14 percent in euros, according to the annual report. Gross reserves reached $48.9 billion at the end of May.
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