Growth forecast cut

The Reserve Bank may have to raise interest rates to protect the country against the outflow of capital and limit the effect of a weaker rand on inflation, the International Monetary Fund said as it cut its growth forecast for South Africa yesterday.

"The external current account deficit has been over 5% for some time, notwithstanding substantial rand depreciation," the IMF said in its World Economic Outlook yesterday.

"Fiscal and monetary policies may need to be tightened to lower the country's vulnerabilities and contain the second-round impact of the depreciation on inflation."

The rand has lost 19% against the dollar since the start of last year, the most among 16 major currencies tracked by Bloomberg, as increased risk perceptions about emerging markets led to an outflow of capital.

This fuelled inflation expectations and the central bank increased the repo rate to 5.5% (and prime to 9%) in January, the first tightening in more than five years. Since then, the rand has gained 8.1% against the dollar and was by yesterday afternoon trading at its strongest level so far this year, climbing to around R10.44.

The IMF expects higher inflation in South Africa, up to 6% from 5.5%. The fund said Africa's second- largest economy would expand 2.3% this year and 2.7% in 2015, lower than the 2.8% and 3.3% estimated in January.

The reduced growth forecasts in countries like Brazil, Russia, South Africa and Turkey were "worrying" and due to policy weaknesses, tighter domestic and external financial conditions or investment and supply constraints, the IMF said.

South Africa, and frontier economies such as Ghana and Nigeria, "should prepare to weather further tightening of global financing conditions by preserving their budget flexibility and by tightening policies".