Higher wage demands could deepen South Africa's monetary policy dilemma - CNBC Africa

Higher wage demands could deepen South Africa's monetary policy dilemma

Southern Africa

by Reuters 0

Higher wage demands could deepen South Africa's monetary policy dilemma. Photo: Wikimedia.

Demand for above-inflation pay rises in South Africa look set to aggravate the central bank's big dilemma: how to keep a lid on inflation - usually by raising interest rates - without snuffing out already slow economic growth.

This year's wage-bargaining season has kicked off in the power, automotive and mining sectors, with initial demands ranging from 13 to 20 percent, far above the current inflation rate of 6.1 percent.

If history is anything to go by, workers are unlikely to accept the inflation-linked pay offers many employers tend to make at first. Lower pay-rise offers could even increase the threat of work stoppages, further hurting an economy forecast to expand less than 1 percent this year compared with 1.3 percent in 2015.

Wage talks between the National Union of Metal Workers of South Africa (Numsa) and employers in the auto component sector have hit a deadlock and any strikes could potentially affect car makers such as Ford, Volkswagen and Toyota.

The sector was hit by a month-long pay strike in 2013, disrupting car plants and bruising investor sentiment.

Analysts say pay deals that outstrip inflation will only make it harder for the South African Reserve Bank to fight rising price-growth without further depressing the economy.

"There is more scope for the SARB (monetary) policy dilemma to worsen rather than dissipate in the coming months," BNP Paribas Securities economist Jeffrey Schultz said.

The central bank, which is forecasting economic growth of 0.6 percent this year, next meets to decide on interest rates on July 21 after holding the rate at 7 percent in May.

 

A SELF-FULFILLING PROPHECY?

The bank, which has hiked rates by 200 basis points in total since January 2014 to get inflation down into its target band of 3 to 6 percent, has said it was paying close attention to wage expectations.

"The SARB is concerned about the rising inflation expectations, and for good reason: these can become a self-fulfilling prophecy," Deputy Governor Daniel Mminele said in speech posted on the bank's website on Wednesday.

"Rational agents will demand compensation in line with their inflation expectations to protect their purchasing power, resulting in rises in input costs and eventually in the general price level," he said.

Policymakers are also watching pay talks in the platinum sector, where wage talks kick off in July. A record five-month strike over wages in 2014 hurt production at Anglo American Platinum, Impala Platinum and Lonmin.

Analysts suggested that central bank interest rate moves are likely to be determined by how the wage talks end.

Nedbank Capital head of research Mohammed Nalla said higher wage deals would not be a problem provided they lead to similar gains in productivity and output.

"This has not been the case in South Africa and is a large contributor to our deteriorating international competitiveness over the longer term," Nalla said.

"If the wage negotiations trend toward more realistic settlements this would obviously help anchor broader economy-wide inflation expectations and would aid the SARB in keeping rates on hold for the foreseeable future," he said.

But he added: "The inverse also applies in that if there is evidence of a sustained and multiyear above inflation settlement, this may create fears of a wage price spiral."

NKC African Economics' Hanns Spangenberg said the central bank may be forced to hike rates aggressively if large pay hikes are agreed on.

"We would expect to see an increased pace of tightening should wages be increased by such a level that would markedly incite inflation levels," he said.

 

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