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Twin deficits, weak growth a risk to SA policy

Nov 28 2014 12:41

Johannesburg - South Africa's current account and fiscal deficits as well as its poor economic growth pose a risk to monetary and fiscal policy, Reserve Bank Deputy Governor Daniel Mminele said on Friday.

In a speech delivered at a banking conference in Johannesburg, Mminele said global conditions had become "less hospitable" to countries with large external funding requirements.

South Africa is running persistently large shortfalls on its budget and current accounts, increasing its vulnerability at a time the United States is expected to start raising interest rates, which would reduce appetite for emerging markets.

The current account has traditionally been funded by foreign portfolio inflows.

"Against the background of South Africa’s elevated current account deficit, which is expected to only correct slowly, the risk of abrupt swings in capital flows cannot be under-estimated," Mminele said.

He voiced concern about rising core inflation in South Africa, with official data showing that the price gauge, which strips out food, petrol, energy and non-alcoholic beverages, edged up 0.1 percentage points to 5.7% year-on-year in October.

The central bank, which targets a CPI inflation rate of 3% to 6%, raised interest rates by 75 basis points to 5.75% this year, signaling a gradual tightening cycle.

The rand currency continues to pose risks to the inflation outlook, given its vulnerability to swings in market sentiment as investors speculate on the timing and scale of monetary policy normalisation in leading economies.

Future rate increases in South Africa would depend on the evolution of inflation expectations, the timing and speed of normalisation of monetary policy in the US and the state of the domestic economy, Mminele said.

The bank's Monetary Policy Committee will next meet in January to decide on interest rates.

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daniel mminele  |  inflation  |  sa economy  |  deficit


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