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South African Inflation Mostly of ‘Cost-Push’ Nature

South African inflation was mostly of a cost-push nature over the past year and there are still reasons to justify caution on the outlook for economic growth, central bank Deputy Governor Daniel Mminele said.

The moderate pace of core inflation, which excludes food, fuel and electricity, showed that while there is evidence that price pressures are becoming more broad-based, these will probably be contained by subdued domestic economic growth, Mminele said in a speech today in Pretoria.

Manufacturing and mining has struggled to recover from the 2009 recession in Africa’s biggest economy as a slowdown in Europe, one of the country’s main trading partners, lowered demand for exports. Consumer spending has been the main driver of growth, boosted by the lowest benchmark interest rate in more than three decades.

“Many factors justify caution, above all the uncertain global environment, and the Reserve Bank’s latest projection for 2012 growth at 3 percent still falls marginally short of the growth rate achieved last year,” Mminele said.

The world economy and global markets face significant challenges and downside risks remain, with geopolitical tensions potentially triggering higher oil prices, he said.

Manufacturing output contracted 2.7 percent in March from a year earlier, the first decline in eight months, the country’s statistics agency said today. Mining production dropped 9.8 percent in the same month, it said. The Reserve Bank has kept the key policy rate at 5.5 percent since November 2010 to support economic growth.

“After today’s number, growth will be closer to 2.5 percent than 3 percent,” Isaac Matshego, an economist at Nedbank Group Ltd., said in an interview. “This means no rates hikes for longer.”

Inflation will gradually decline from the second quarter and average 5.2 percent by the end of next year, Mminele said.

The rand weakened 0.2 percent to 8.0088 against the dollar by 7:25 p.m. in Johannesburg.

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