Higher inflation and deterioration in South Africa’s current account over the past year highlight the need for more balanced growth, Finance Minister Trevor Manuel said on Monday.
But it appeared that growth was becoming more balanced, with tentative signs that consumption was easing on higher interest rates, he said in a written reply to a parliamentary question.
South Africa’s central bank has raised interest rates by 350 basis points since June last year, and is widely expected to lift its repo rate another 50 basis points to 11% on Thursday to tackle soaring inflation.
The targeted CPIX (consumer inflation less mortgage costs) inflation rate has exceeded the bank’s 3% to 6% band for seven months, jumping to 7,3% year-on-year in October, due to rising food and fuel prices and robust consumer spending.
The strong spending has also piled pressure on the current account, the shortfall on which narrowed to 6,5% of GDP in the second quarter but is forecast to widen sharply again.
”Rising inflation and the deterioration in the current account over the past year highlight the need for more balanced growth, which will be achieved through mutually supportive monetary and fiscal policies,” Manuel said.
”By not spending the full value of buoyant tax revenues, the government helps to limit current-account and inflationary pressures, and take some pressure off domestic interest rates, contributing to the sustainability of economic growth.”
Huge revenue overruns have led to significant tax cuts in the past but the Treasury has signalled it will bank some funds in future despite forecast budget surpluses over the next three years.
Manuel said economic growth of 4,5% in the second quarter of 2007 was in line with estimates of potential output, suggesting growth was becoming more balanced.
”Furthermore, there are some tentative signs that consumption has been dampened by rising interest rates,” he said.
Statistics South Africa said last week growth accelerated to 4,7% in the third quarter, beating forecasts of a 4,2% expansion.
Central bank data shows household consumption spending increased by annualised 5,5% in the second quarter, easing from 7,4% in the previous period. — Reuters