IMF urges SA's vigilance on inflation despite falling oil prices

SA's economy is still struggling since the recession and SARB says interest rates will have to gradually rise.

South African Rand. Picture: Reinart Toerien/EWN.

JOHANNESBURG - Falling oil prices and cuts in stubborn government deficits give South Africa's Reserve Bank (SARB) room to be accommodative, but it should remain vigilant on inflation, the International Monetary Fund said on Thursday.

Africa's most advanced economy has been struggling to grow after a 2009 recession, but the central bank has said interest rates will have to gradually rise.

The SARB has raised interest rates by 75 basis points this year as inflation spiralled above the 3 to 6 percent target, peaking at 6.6 percent in May. Inflation has since slowed to 5.8 percent in November, partly on falling crude costs.

"While recent declines in oil prices and the planned fiscal consolidation could allow the SARB to remain accommodative for some time, risks to the inflation outlook need continued careful monitoring," IMF said in a statement.

South Africa's Treasury plans to narrow chronic shortfalls in its budget and current account. Those deficits have made the rand vulnerable to portfolio outflows during bouts of global risk aversion.

The IMF said the flexibility of the rand's exchange rate and the favourable currency composition of its external debt were effective buffers against volatile capital flows, which have historically funded the current account deficit.

It also recommended that to boost resilience, authorities should explore building reserves, which fell to $42.9 billion in November from $43.1 billion in October, while taking into account related costs.

The local economy is expected to grow by only 1.4 percent this year, constrained by lengthy labour disputes and electricity shortages, and by 2.1 percent in 2015.

Better infrastructure and stronger external demand are expected to boost growth to 2.75 percent in 2016-19. But that is not enough to provide employment for the one in four South Africans who lack jobs, the IMF said.

"Risks are tilted to the downside. A sharp surge in global financial market volatility could lead to capital flow reversals and trigger a disorderly adjustment in the current account deficit," the IMF said