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IMF: SA needs to raise interest rates

Economy

Johannesburg - The South African Reserve Bank may have to raise borrowing costs to protect the country against the outflow of capital and limit the effect of a weaker rand on inflation, the International Monetary Fund said.

“The external current-account deficit has been over 5 percent for some time, notwithstanding substantial rand depreciation,” the Washington-based lender said in its World Economic Outlook today.

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Cape Town. 100219. South Africa is coming out of its first recession in almost two decades reasonably rapidly, says Reserve Bank Governor Gill Marcus. Marcus also said monetary policy remains directed towards containing inflation. The central bank has cut rates by 500 basis points since December 2008, and left the repo rate flat at 7,0% at its last four meetings. Picture Mxolisi Madela

“Fiscal and monetary policies may need to be tightened to lower the country’s vulnerabilities and contain the second-round impact of the depreciation on inflation.”

The rand has lost 19 percent against the dollar since the start of last year, the most among 16 major currencies tracked by Bloomberg, as increased risk perceptions about emerging markets led to an outflow of capital.

This fuelled inflation expectations and the central bank increased its benchmark repurchase rate to 5.5 percent on January 29, the first tightening in more than five years.

Since then, the rand has gained 8.1 percent against the dollar.

While the IMF cut its forecast for South Africa’s 2014 current-account deficit to 5.4 percent of gross domestic product from 6.1 percent, the inflation projection was increased to 6 percent from 5.5 percent.

The lender said Africa’s second-largest economy will expand 2.3 percent this year and 2.7 percent in 2015, lower than the 2.8 percent and 3.3 percent estimated in January.

The reduced growth forecasts in countries like Brazil, Russia, South Africa and Turkey is “worrying” and because of policy weaknesses, tighter domestic and external financial conditions or investment and supply constraints, the IMF said.

South Africa, and frontier economies such as Ghana and Nigeria, “should prepare to weather further tightening of global financing conditions by preserving their budget flexibility and, where vulnerabilities are of particular importance, by tightening policies,” the IMF said. - Bloomberg News

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