South Africa High Wage Deals May Force Rate Increase, SARB Says

  • Reserve Bank aware that rate-hiking cycle negative for growth
  • Policy makers can't tolerate multiple shocks to inflation

Salary deals in South Africa that exceed the inflation rate could force the central bank to increase interest rates, Deputy Governor Kuben Naidoo said.

“Wage settlements that are above inflation and productivity growth threaten to undermine employment and pose a significant upside risk to the inflation outlook,” Naidoo said on Friday in a speech, a copy of which was published on the central bank’s website. “Settlements of this nature may force the Reserve Bank to adopt a tighter monetary policy stance in order to curtail their second-round inflation impact.”

The rand’s 25 percent decline against the dollar since the start of 2015 and the worst drought in more than a century are pushing up consumer prices and the inflation rate surged to 6.2 percent in January, the highest in 17 months.

While the central bank is aware of the fact that the current interest-rate hiking cycle will have a negative effect on the economy, it will be short-sighted to overlook inflation and only consider short-term growth, Naidoo said at the Federation of Unions of South Africa.

The Reserve Bank, which targets inflation between 3 percent and 6 percent, increased its benchmark repurchase rate by 50 basis points to 6.75 percent on Jan. 28, even as the economy is forecast to expand at the slowest pace in seven years in 2016.

If policy makers expect a breach to the inflation target “to be temporary or to be caused by an external shock, we may opt to look through such an event,” he said. “While we are able to tolerate a single external shock for a limited period of time, we cannot tolerate multiple simultaneous shocks that are likely to keep inflation elevated.”

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