Rate cuts ‘are no magic cure for joblessness’

Ethel Hazelhurst

Low interest rates were no magic formula for employment growth, Reserve Bank governor Gill Marcus said on Wednesday, after announcing the monetary policy committee (MPC) had decided to keep the bank’s repo rate at 5 percent.

She was asked the MPC’s view on calls from trade unions to cut interest rates to help create employment.

Marcus noted that in 2005/06, when the economy was growing at more than 5 percent, unemployment fell from about 25 percent but only to just below 22 percent. “That 22 percent is indicative of a structural problem and you’re not going to fix that problem with lower interest rates.”

She pointed out that interest rates in the euro zone were at an all-time low but unemployment was rising across the region towards 12 percent, with Greece and Spain at more than 26 percent. She also highlighted the fact that South Africa’s interest rates were already negative in real terms – in other words lower than inflation.

The repo rate at 5 percent is nearly 1 percentage point below February inflation. Negative interest rates penalise savers who lose money in real terms when they place funds in bank deposits.

Marcus said there were many factors responsible for South Africa’s chronically high unemployment rate.

In her speech, Marcus identified one of them: “excessively high wage increases”. Quoting Andrew Levy Employment Publications, she said wage settlements in collective bargaining agreements had picked up significantly from 6.8 percent increases in the third quarter of last year to 8.2 percent in the fourth.

And she warned this trend “remains an upside risk to the inflation outlook”.

South Africa is effectively in a stagflationary trap – high inflation and low growth. The first requires a rate hike and the second a rate cut – which is why the repo rate has been on hold since July last year.

The bank has revised its inflation forecast upwards. “Inflation is expected to breach temporarily the upper end of the target range in the third quarter when it is expected to average 6.3 percent,” Marcus said. In January a 6.1 percent peak was forecast for the third quarter.

Marcus said core inflation – as measured by the consumer price index excluding food and non-alcoholic beverages, petrol and energy – would peak at 5 percent in the second quarter of next year, almost unchanged from the previous forecast. The forecast incorporates the new weighting of the consumer price basket and the rebasing of the index from January. It also takes account of the 8 percent electricity price increase granted by the National Energy Regulator of SA. Eskom had asked for 16 percent.

Marcus said rand weakness was the main risk to inflation. “Since the beginning of the year, the rand has depreciated by 8.4 percent against the US dollar and fluctuated within a range of R8.45 and R9.26.”

She said manufacturers, particularly exporters, should take advantage of the opportunity created by the depreciating unit. A weak currency reduces the price of local goods in offshore markets.

“Ensuring that this increase in competitiveness is sustained will require improved productivity and the containment of wage and other costs pressures.”

At the press conference she warned: “We need to get our goods out of the ground and exported to take advantage of the weaker rand.” Supply has been disrupted since August last year by ongoing labour disputes and work stoppages.

Though neither the markets nor economists expected the repo rate to move, the rand weakened from R9.2159 to the dollar just after noon when Marcus started speaking to R9.31 shortly before 3pm, presumably on her comments.

Forward rate agreements (FRAs) also reacted sharply. Mohammed Nalla, the head of strategic research at Nedbank Capital, said FRAs surged higher on both the inflation data and the governor’s comments. He said the three-month rate in 12 months’ time was now pricing in a 47 percent probability of a 50 basis point hike, while the three-month rate in 18 months’ time is pricing in a greater than 100 percent probability of a 50 basis point hike.