South Africa Rate Increase Possible Even as GDP Contracts

South Africa will consider increasing interest rates even as Africa’s second-largest economy risks falling into recession, Reserve Bank Deputy Governor Daniel Mminele said.

While growth has been hit by a four-month wage strike by more than 70,000 workers at the world’s three largest platinum producers, inflation accelerated last month to beyond the central bank’s 3 percent to 6 percent target band.

“There is no question that we are in a rate-hiking cycle,” Mminele, 49, said in an interview in the Mozambican capital, Maputo, yesterday where he attended a conference of the International Monetary Fund. “Interest rates need to normalize over time, but it is not a preset course and will be data dependent.”

The central bank left its benchmark repurchase rate unchanged at 5.5 percent for a second consecutive meeting on May 22 as concerns about growth outweighed worries about inflation, which accelerated to 6.1 percent in April. South Africa’s economy contracted by 0.6 percent in the three months through March, the first decline since a 2009 recession.

“While there is a risk that we could fall into what is termed a technical recession if we have another quarter of negative growth, it’s not a foregone conclusion,” Mminele said. “The risk certainly exists given that the setting hasn’t improved much.”

Platinum Strike

The strike at the South African operations of Anglo American Platinum Ltd., Impala Platinum Holdings Ltd. and Lonmin Plc has led to a 24.7 percent slump in mining production in the three months through March, the biggest fall since the second quarter of 1967.

“The situation has not improved much in the sense that strikes in the platinum sector is obviously still upon us,” Mminele said. Recent economic indicators “point to a second quarter that is likely to be very weak again,” he said.

Reserve Bank Governor Gill Marcus increased interest rates in January for the first time in more than five years as a drop in the rand’s exchange rate fueled inflation expectations. Finance Minister Nhlanhla Nene said yesterday the central bank has a flexible mandate which allows it space to let inflation breach the bank’s target.

While the rand has gained 8 percent against the dollar since the rate rise, Mminele said the currency remains vulnerable and the biggest source of risk for the inflation outlook.

‘Uncomfortably High’

The rand’s direction is likely to be determined by the current-account deficit, Mminele said. The gap on South Africa’s current account, the broadest measure of trade in goods and services, narrowed to 5.1 percent of GDP in the last quarter of 2013.

The deficit “is a source of vulnerability, it remains uncomfortably high,” Mminele said.

The depreciation of rand, which has weakened 19 percent against the dollar since the beginning of last year, has failed to significantly narrow the current-account deficit “because of the supply-side disruptions” such as the platinum strike, he said.

“There has been a delay in the correction that we’d all been hoping for, that would have come out of the benefits that would have been had from a depreciating currency,” Mminele said. “The key issue is that our export sector is still not performing in the manner that it ought be performing.”

The rand lost 0.6 percent against the dollar and traded at 10.4781 as of 2:14 p.m. today in Johannesburg.

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