South Africa May Need to Cut Rates if Growth Continues to Slow, OECD Says

South Africa’s Reserve Bank may need to cut interest rates if the economy’s recovery continues to weaken, the Organization for Economic Cooperation and Development said.

Underlying inflation is “well anchored” inside the bank’s 3 percent to 6 percent target band, leaving room for a reduction in rates even if the currency depreciates further, the Paris- based OECD said in a report on its website today.

“The first line of defense if the economy is weaker than projected should be monetary policy,” the OECD said. “In the event of a weakening economy, there therefore appears to be scope for further reductions in the Reserve Bank’s policy rate.”

The central bank, led by Governor Gill Marcus, has left its benchmark interest rate unchanged at a 30-year low of 5.5 percent this year to help support the recovery in Africa’s biggest economy, even as price pressures increased. Inflation, which accelerated to the top of the target band in October, will probably average 5.3 percent in 2012 and 4.7 percent in 2013, according to OECD forecasts.

The rand slumped 21 percent against the dollar this year, the worst performer of 16 major currencies tracked by Bloomberg.

“There is likely to be some pass through of that exchange rate move to consumer prices, but the Reserve Bank should continue to look through such temporary factors and may need to ease further if demand growth continues to disappoint,” the OECD said.

The worsening debt crisis in Europe, which buys a third of South African manufactured goods, may curb economic growth, easing inflation pressure, the OECD said. South Africa’s economy will probably expand 3.6 percent in 2012, up from 3.1 percent this year, the OECD said.

The South African government is forecasting growth of 3.4 percent in 2012, less than half the 7 percent it says is needed to slash the 25 percent jobless rate to 14 percent by 2020.

To contact the reporter on this story: Jana Marais in Johannesburg at jmarais@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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