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Johannesburg - There is plenty of room for further monetary easing in South Africa's economy, Finance Minister Trevor Manuel said on Monday.
The central bank has cut interest rates by a total of 250
basis points since December, on signs that inflation is easing,
while the economy in under strain from waning domestic demand
and the global recession.
The Reserve Bank had lifted interest rates by 5 percentage
points between June 2006 and June 2008 to curb inflation.
"Unlike in the US and the UK, we have plenty of room for further monetary easing, and as inflation continues to fall, so too will our interest rates," Manuel said in a speech at the Gordon Institute of Business Science.
Manuel said South Africa's response to the global economic crisis has been sizeable by any measure.
"Our fiscal response as a ratio of the slowing in our gross domestic product has been larger than nearly all other countries, except for the United States. On the monetary side, the interest rate has been cut by 250 basis points, ranking us in the middle of the G20 spectrum."
He said the big challenge in the short and medium term is to minimise the damage to the rest of the economy from deflation in the over-indebted groups and sectors.
"Unfortunately, this is not a simple exercise, and many firms that have expanded in recent years will fall back to more sustainable levels of production and employment," said Manuel, who stressed that some sectors would need to shrink even further as they are more fundamentally uncompetitive.
Manuel cautioned against spending public money to meet the frequent demand for special assistance to specific firms and sectors.
"In the National Treasury we've come to recognise the importance of creating the fiscal space when revenues are strong to help offset the downturns. Extended to the private sector, it suggests that expectations that government will socialise the costs of irrational exuberance cannot be entertained. This is neither good for long term growth nor is it what is required to deal with our shorter term difficulties."
Manuel gave South African consumers a pat on the back for setting the stage for a recovery in the medium term. Household debt levels have declined sharply, from about 78% of GDP to around 70%. This along with declining debt service costs, would help to free up considerable purchasing power.
- Fin24.com and Reuters