Inflation boosts rate hike case

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IOL economy arrows Filomena Scalise

Pretoria - The shortfall on South Africa's current account unexpectedly narrowed to its smallest since 2012 in the first quarter of the year as lower dividend payments to offshore investors offset weak export receipts.

The lower gap, coupled with data showing inflation accelerated away from the Reserve Bank's 3-6 percent target in May, could force interest rates higher this year despite pressure on the economy from a prolonged platinum strike.

The current account deficit was at 4.5 percent of GDP in the first three months of the year, the South African Reserve Bank (SARB) said, compared with 5.1 percent gap in the fourth quarter of 2013 and against market expectations of 6.1 percent.

This is the smallest gap since first quarter of 2012, when the shortfall came in at 3.9 percent of GDP.

The SARB said it continued to be financed through capital inflows.

The rand, which has long been vulnerable to wide current account shortfalls, rallied to a session high of 10.7670 against the dollar.

Data also showed consumer inflation accelerated more than expected to 6.6 percent year-on-year in May from 6.1 percent in April, backing the case for an increase in interest rates this year.

The bank has kept rates on hold since January, when it lifted the benchmark repo rate by 50 basis points to 5.5 percent.

However, a hike is not a given as the economy grapples with a 20-week-long platinum strike that has hit the world's three largest producers of the metal and led to a 0.6 percent contraction in GDP at the start of the year.

In its quarterly bulletin, the central bank estimated that the current account deficit would have been 4.2 percent without the negative effect of the strike, while the economy would have grown 1.6 percent in the first quarter.

“Today's CPI numbers will most certainly continue to highlight the SARB's current dilemma of managing an uncomfortable domestic inflation environment amid a weakening economic backdrop,” said BNP Paribas Cadiz Securities economist Jeffrey Schultz.

“With South Africa running negative real policy rates of more than 1 percent now, we maintain our view that the SARB's hand is likely to be forced to hike the policy rate modestly in the second half, most likely in 25 basis point increments.” - Reuters



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