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South Africa Faces ‘Downside Risk’ From Europe, Mminele Says

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Aug. 5 (Bloomberg) -- Europe’s debt crisis may undermine South Africa’s economic outlook at a time when domestic indicators show growth is weakening, central bank Deputy Governor Daniel Mminele said.

“Risks to the downside are increasing,” Mminele told economists in Johannesburg today. Data since the last Monetary Policy Committee meeting on July 21 “appear to suggest that we are going to see certainly weaker numbers.”

Greece, Portugal and other European nations are crimping spending to ease budget deficits, curbing growth in Europe, which buys about a third of South African manufactured exports. The Reserve Bank has left its benchmark interest rate unchanged at a 30-year low of 5.5 percent this year as the recovery in Africa’s biggest economy faltered.

“The rate is going nowhere soon, at least not upwards,” said Johan Rossouw, chief economist of Vunani Securities Ltd. “The very earliest we’re going to see rates going up now is sometime in the middle of next year.”

Manufacturing, which makes up 15 percent of South Africa’s economy, is under pressure after the Purchasing Managers Index declined to a two-year low of 44.2 in July, indicating a drop in production. South Africa’s jobless rate, the highest of 61 countries tracked by Bloomberg, increased to 25.7 percent in the second quarter as 174,000 became unemployed, Statistics South Africa said on July 28.

Broader Mandates

Investors have pared expectations of an interest rate increase this year. The yield on a 12-month forward-rate agreement, which investors use to lock in borrowing costs, has dropped to 6.05 percent today from 6.99 percent on May 13, according to data compiled by Bloomberg. That indicates traders now predict the key rate will be half a percentage point higher in a year’s time.

The global economic crisis requires central banks to broaden their mandates, rather than focus only on price stability, Mminele said.

“We’ve certainly abandoned the paradigm which characterized how central banks typically operated prior to the crisis where there was always a very strong specialization on stabilizing prices,” he said. “There has been a broadening of central bank mandates and what is expected of them in forthcoming challenges and in this country.”

The Reserve Bank aims to keep the inflation rate, which reached a 15-month high of 5 percent in June, within a range of 3 percent to 6 percent. Inflation is forecast to breach the upper limit of the target band in the fourth quarter and average 6.3 percent in the first three months of 2012, according to the central bank.

To contact the reporter on this story: Franz Wild in Johannesburg at fwild@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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