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South Africa May Have Scope for Further Rate Cuts, IMF Says

South Africa’s declining inflation rate gives the central bank scope to cut interest rates should the slowdown in the global economy deepen, the International Monetary Fund said.

“If the external environment were to deteriorate further, the resulting moderation of inflation will allow the South African Reserve Bank greater room to respond,” the Washington-based lender said on its website today. “Monetary policy should remain accommodative, especially given the limited fiscal space.”

The Reserve Bank, led by Governor Gill Marcus, unexpectedly cut the benchmark interest rate by 0.5 percentage point to 5 percent on July 19 to bolster economic growth as the European debt crisis erodes demand for South Africa’s manufactured goods. Inflation eased to a 14-month low of 4.9 percent in July, from 5.5 percent in June, prompting expectations of more cuts.

Forward-rate agreements due in December, used to speculate on interest rates, have dropped since the last rate cut and at 4.77 percent are 31 basis points lower than the Johannesburg Interbank Agreed Rate. That indicates investors are pricing in about a 60 percent chance of another half-point cut this year.

Stubborn Unemployment

The IMF estimates that inflation will be 5.4 percent by year-end, while the economy will expand 2.6 percent this year, 3.4 percent in 2013 and 4 percent the following year. The government has said it needs 7 percent annual growth to cut the jobless rate to 15 percent by 2020 from 25 percent.

“The stubbornly high unemployment rate could become politically and socially unsustainable,” the IMF said. It also warned that “fiscal space to cope with future shocks has declined considerably.”

It called on the government to overhaul labor laws to make it easier for companies to hire, because the current regime was helping entrench joblessness and inequality. High wage settlements were also undermining the country’s competitiveness, offsetting the benefits of a weaker rand, the IMF said.

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings have all cut their outlook on South African credit to negative from stable since November, warning that the government may miss its deficit targets.

South Africa will probably have to accumulate additional foreign reserves over coming years as a precautionary measure, given its need to finance its current account deficit, the IMF said. South Africa had $49.4 billion’s worth of gold and foreign currency reserves at the end of last month.

The National Treasury said it welcomed the IMF assessment. “Many of the issues raised by the IMF report are already reflected in the priorities and outcomes that government has set itself,” it said in an e-mailed statement.

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