Kganyago cautions over interest rates
‘Weakening growth will lead to hike’
THE Reserve Bank would prefer not to raise interest rates during a slowdown‚ but as long as the country’s economy remained geared to producing weak growth and high inflation‚ it would have to do just that.
This was the hard-hitting message Reserve Bank governor Lesetja Kganyago delivered at the Labour Law Conference in Johannesburg on Wednesday.
He said inflation appeared to have settled around the top of the target range‚ close to 6%. This implied that nominal market interest rates would never fall much below 9%.
While this was hardly acceptable‚ SA had too much inflation to lower interest rates.
“If we want lower interest rates . . . then we have to lower inflation outcomes arising from administered price processes and‚ above all else‚ the way in which prices and wages are determined in our collective bargaining system‚” he said.
Kganyago said reducing the inflationary impulse from price and wage-setting to about the middle of the 3%-6% inflation target range, would help to create jobs and ease policy constraints. In the three years to 2015‚ average wages and salaries had risen 9.3%‚ 7.7% and 8.5% in each year‚ respectively.
Employment growth had slowed each year since 2011.
The bank expects growth to slow to zero this year and for SA to lose jobs on a net basis.
“Yet even as economic growth and job creation stall‚ prices – fuelled by food price and currency shocks – as well as wages and salaries‚ continue to increase above the targeted inflation rate.”
The bank forecasts that unemployment will continue to rise above 25%‚ but despite this and minimal GDP growth‚ it expects wage growth to remain stubborn. “We’ve built an economy that produces much more inflation than growth and spits out unemployment as a byproduct‚” Kganyago said.
The challenge was to institute structural reforms to product and labour markets so that the economy could expand without accelerating inflation.
Kganyago said unusually high levels of unemployment were explained partly by a central bargaining system that made it easy to reach deals that kept out new and smaller firms‚ resulting in a lower level of employment at higher wages and a concentration of fewer‚ more profitable firms.
Some studies suggested that these arrangements reduced employment in affected industries by 8%-13%‚ in large part because they hurt small‚ labour-intensive firms.
These were exactly the types of firms that SA needed.
Commenting on the link between wages and employment‚ Kganyago noted that SA’s agricultural sector had shed hundreds of thousands of workers after the imposition of a minimum wage at an excessive level. The economy had also lost a disproportionate number of jobs during the global financial crisis‚ in large part because of high wages and labour market rigidities.
“If we try to play a game in which fewer and fewer people get higher and higher wages‚ while more and more people wind up unemployed‚ we can only lose‚” he said.
“We have to get more people into work.” — BDLive