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SA’s Mboweni warns on inflation

SOUTH Africa’s economy will slow in 2008 although local banks are coping well and there is no cause for alarm, central bank Governor Tito Mboweni said on Wednesday.

He also said a weaker rand currency would, over time, help to narrow the current account deficit – which stood at a hefty 7,5% of gross domestic product (GDP) in the fourth quarter of 2007, slightly higher than expectations.
“It is very clear there is a slowdown in the South African economy … but there should be no cause for alarm,” he told reporters at the release of the central bank’s March quarterly bulletin.
The global challenges from problems in the US subprime mortgage market were “immense”, he said, but the local financial system was still sound and liquidity was adequate.
Higher interest rates, slower global growth and a domestic electricity shortage have hit the local economy and the Treasury has forecast 4% growth in 2008 after 5,1% in 2007.
The world’s biggest platinum and key gold mines were forced to shut down for five days in January and are still not receiving full power as ageing infrastructure buckles at utility Eskom.
The crisis helped boost platinum prices to new record highs but knocked the rand to a near-five-year low against the dollar.
Mboweni said while the weaker rand acted as a shock-absorber for the current account, it also clouded the outlook for the CPIX inflation measure which the central bank aims to keep in a 3% to 6% range. CPIX reached a five-year high of 8,8% year-on-year in January.
The central bank said the shortfall on the current account shrank in the fourth quarter from 8,1% in the third, but the 2007 gap of 7,3% of GDP was the highest since 1971.
The rand was trading at around 8,04 per dollar on Wednesday. Despite global dollar weakness, the rand has depreciated about 15% against the US currency so far this year while weakening 21% against the euro.
However, “I don’t expect the exchange rate to depreciate further, for as long as you have FDI (foreign direct investment) and other inflows,” Mboweni said.
The bulletin showed the deficit continued to be financed by capital inflows, although the global credit crisis has made international investors much more risk averse and portfolio inflows by foreigners fell sharply.
Mboweni said the central bank had to remain vigilant against the risk of higher food and fuel costs feeding wage claims and other costs.
“Things are going to get worse before they get better,” he said. “I hope the second round effects don’t continue to rise, thereby forcing the hand of monetary authorities to tighten (policy).”
The Reserve Bank has raised its repo rate by 400 basis points to 11% since June 2006 to tame inflation and curb robust spending. It left the rate unchanged at 11% in January, citing signs of slowing growth.
The policy committee meets again on April 9-10.
The bank’s data showed while higher rates have curbed consumer spending, inflation continues to accelerate.
Household spending eased in the fourth quarter, bringing gross domestic expenditure down to an annualised 0,2% from 5,4%.
In a separate release,  Statistics South Africa said retail sales rose by 0,2% in January, after a decrease of 0,5% in December, indicating a slight recovery in spending. – Reuters.

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