Rising inflation sees SA economy treading lightly

While the Reserve Bank has left the repo rate unchanged at 5.5%, economists warn that inflation will further pressurise the country's economy.

A flagging growth rate and rising inflation will see the South African economy treading lightly through choppy times, economists told Mail & Guardian on Thursday.

The comments follow the announcement by the Reserve Bank of its decision to leave the repo rate unchanged at 5.5%.

The Reserve Bank also revised its growth forecasts to 3.2% in 2011 and 3.6% in 2012 after pegging growth at 3.7% and 3.9% for each year respectively.

While it was widely expected that the Reserve Bank would leave rates unchanged, economists have warned that should economic conditions not improve in the immediate future; the bank would be faced with some tough decisions.

“It’s a very difficult time in the world as prices rise and growth slows. You need to get people to spend in order to stimulate the economy, so it’s a very difficult position the Reserve Bank finds itself in,” said economist Mike Schussler of economist.co.za.

With growth sliding and inflation increasing, there is room for the Reserve Bank to drop interest rates below 5.5%—the lowest it has been since 1981.

The main point of concern at the moment is the weakening of the rand, which pushes up inflation more by increasing the costs of imports—providing further impetus on a push for a rate cut.

The local currency dropped more than 9% this week along, falling from R7.66 to the greenback on Monday to trade at R8.28 by the closing bell on Thursday.

“The rand has been a constraint on inflation but it will quickly weigh in as the currency weakens and imports become more expensive,” Investment Solutions chief economist Chris Hart told the M&G.

Unclear indications
At this stage though, there is no clear indication that the Reserve Bank will move on the repo rate if current economic conditions continue.

Reserve Bank governor Gill Marcus was candid about the institution’s readiness to act if necessary but indicated that it might try to weather the storm.

“We need to see through the current noise and look through to the bigger picture,” she said when answering questions after the announcement.

Absa Capital senior economist Gina Schoeman echoed Marcus’s sentiment, but cautioned against slow action should the need to drop rates arise.

“While there is only moderate risk for now, should we see any type of recessionary activity, the Reserve Bank will have to rethink things and consider a rate cut,” she said.

This was further supported by Schussler, who said a drop in rates was inevitable should the economic situation not improve.

“If conditions stay the same, I would say rates will more than likely drop the next time the MPC meets,” he said.


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