News Column

Deficit in surprise fall to 4.5%

June 19, 2014

South Africa's current account shortfall unexpectedly narrowed to its smallest since 2012 in the first quarter of the year as lower dividend payments to offshore investors offset weak export receipts.

The lower gap, coupled with data showing inflation accelerated away from the Reserve Bank's 3-6 percent target last month, could force interest rates higher this year despite pressure on the economy from a prolonged platinum strike.

The current account deficit was at 4.5 percent of GDP in the first three months of the year, the Reserve Bank said, compared with a 5.1 percent gap in the fourth quarter of last year and market expectations of 6.1 percent.

In the first quarter of 2012, when the shortfall came in at 3.9 percent.

The rand, which has been vulnerable to wide current account shortfalls, rallied yesterday to a session high of 10.767 against the dollar.

Data also showed consumer inflation accelerated more than expected to 6.6 percent year-on-year last month from 6.1 percent in April, backing the case for an increase in interest rates.

The bank has kept rates on hold since January, when it lifted the benchmark repo rate by 50 basis points to 5.5 percent.

However, a hike is not a given as the economy grapples with a 20-week platinum strike that has led to a 0.6 percent contraction in GDP.

In its quarterly bulletin, the central bank estimated that the current account deficit would have been 4.2 percent without the negative effect of the strike, while the economy would have grown 1.6 percent in the first quarter.

"Today's CPI numbers will most certainly continue to highlight the… dilemma of managing an uncomfortable domestic inflation environment amid a weakening economic backdrop," said BNP Paribas Cadiz Securities economist Jeffrey Schultz.

"We maintain our view that the Reserve Bank's hand is likely to be forced to hike the policy rate modestly in the second half." - Reuters

Cape Argus

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Source: Cape Argus (South Africa)

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