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South Africa's inflation seen moderating

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JOHANNESBURG – Growth in South Africa’s economy will be slower than expected but inflationary pressures are poised to ease due to falling food and oil prices, a Reuters poll showed on Thursday.

The forecast for inflation in Africa’s largest economy eased to 5.72 percent for this year. It was previously seen at an average of 5.97 percent, which was near the 6 percent upper limit of the Reserve Bank’s target range.

Expectations for inflation in 2013 were nudged down to 5.35 percent from a previous average forecast of 5.49 percent.

“The oil price declined quite a bit over the past few months from a peak. That makes a significant difference,” said Johan Rossouw, an economist at Vunani Securities.

Oil prices had declined to a low of $88.49 a barrel last seen in December 2010 from a high of $128.40 a barrel in March, which has helped lower consumer inflation since January.

Inflation slowed to below 5.7 percent year-on-year in May from 6.1 percent in April.

The Reserve Bank said on Wednesday it expected inflation to remain within its 3-6 percent target range on a sustained basis to the end of 2014, with the main upside risk coming from falls in the rand due to investor risk aversion.

The rand hit a three-year low of 8.71 against the dollar last month on global fears of contagions from debt problems in the euro zone, South Africa’s biggest trading partner, but has since rallied towards 8.0 to the dollar.

Worryingly for South Africa, economists have for the first time since January nudged down their gross domestic product growth forecast to 2.7 percent from 2.8 percent for 2012.

GDP growth for next year has been trimmed to 3.3 percent from 3.5 percent while 2014’s growth projection was cut to 3.8 percent from 4.0 percent.

“The key is the unsustainability of domestic demand and the turnaround in the labour market all compounding the external slowdown in the economy,” said Peter Attard Montalto, economist at Nomura International.

South Africa’s unemployment rate jumped to 25.2 percent in the first quarter from 23.9 percent in Q4, with employment decreasing by 75,000 between the two quarters.

The central bank’s repo rate has been left at a three-decade low 5.5 percent since November 2010. Economists expect it to be stable for the remainder of this year, rising to 6.0 percent next year and 6.5 percent at the end of 2014.

Although some economists are changing their view to a cut in borrowing costs of 50 basis points this year, the majority sees rates on hold in 2012. “The MPC is already worried about rates being so low and hence will be very cautious about cutting,” said Attard Montalto.

The confidence index continued the upward swing it has seen for most of this year, bouncing to 279.60 in June from 267.28 in the previous month. The index of consists of six weighted indicators that looks two years ahead.

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