SA Reserve Bank should keep rates low says OECD
South African policy makers should keep interest rates at the lowest level in more than three decades while inflation allows it, according to the Organisation for Economic Co-operation and Development.
"The supportive monetary policy stance should be continued as long as inflation remains contained and expectations anchored," the Paris-based group said in its Economic Outlook.
The Reserve Bank has kept its benchmark interest rate at 5% since July 2012 and probably won’t change it on November 21, according to all 22 economists surveyed by Bloomberg. Inflation slowed in September to 6 per cent, at the top of the bank’s 3% to 6% target band.
While Finance Minister Pravin Gordhan has pledged to freeze spending increases, this may do little to narrow South Africa’s budget deficit, the OECD said. Gordhan last month forecast the budget deficit will narrow to 3 per cent of gross domestic product in the year through March 2017 from an estimated 4.2 per cent this year, with gross debt increasing to 48 per cent of GDP in 2017.
"As the economy gathers pace, additional fiscal consolidation measures on the spending side should be introduced," the OECD said.
"If growth surprises on the upside, the additional revenues should be used to reduce public debt more than planned."
The OECD estimates a fiscal deficit of 6.2% of GDP this year and 5.8% in 2014. The rand’s 16% slump against the dollar this year may help to narrow the current-account deficit as exports become more competitive, the OECD said. The shortfall will probably reach 6.5% of GDP this year, according to the National Treasury, which made the projections before substantial revisions to the trade data last week. – Bloomberg