Cosatu: Current repo rate won't help employment
A flailing rand dogged by labour unrest and the threat of high wage talks has prompted the South African Reserve Bank to keep the repo rate unchanged at 5%, which the Reserve Bank announced on Thursday.
But Cosatu said on Friday it was disappointed by the Reserve Bank's decision to keep the repo rate unchanged.
"The committee has missed yet another opportunity to save and create jobs by giving a boost to growth and investment and to encourage emerging businesses," Cosatu spokesperson Patrick Craven said.
"Unemployed workers in particular will be dismayed at yet another conservative monetary policy decision, based on a groundless fear of rising inflation, when by far the biggest problem in our economy is the crisis of massive unemployment and widespread poverty."
Last month, analysts speculated a possible rate cut – the first since last July – following cuts by five major central banks, including the European Central Bank, India and the Bank of Japan.
But the strong depreciation of the rand caused the committee to back away from such a move. The currency devalued at a rate of 7.9% in May, the second-worst performer in 160 currencies across the globe monitored by Bloomberg.
Mounting labour concerns, set against an increasing current account deficit and heightening inflationary pressures, meant that the monetary policy committee (MPC) meeting was "increasingly concerned about the deteriorating outlook for the South African economy," Reserve Bank governor Gill Marcus said on Thursday.
'Critical domestic issues'
While the rand felt the impact of external developments such as the strengthening dollar, it had also been compounded by local factors that undermined investor confidence since mid-2012, said Marcus. "There are a number of critical domestic issues that are contributing to the vulnerability of the economy that need to be urgently addressed," she said.
Significant among these was the outlook of the mining sector, which had seen decreased production in February and March.
"The outlook for the sector remains bleak with threats of shaft closures and retrenchments, falling commodity prices, high wage demands and a risk of protracted periods of industrial action and further supply disruptions," said the governor.
Craven said it was "worrisome" that the decision came soon after Statistics South Africa's quarterly labour force survey found the number of unemployed people increased by 100 000 to 4.6-million between the fourth quarter of 2012 and the first quarter of 2013.
"[The] MPC appears to live in a different world, and clearly cannot, or will not, see the devastating consequences of their slavish adherence to discredited monetary policies, based on a misguided fear of inflation," Craven said.
He took exception to Marcus's call for restraint in wage increases, and her comments that the slow pace of employment in the private sector was undermined by the "fractious nature of recent wage negotiations".
Meanwhile, the outlook for household consumption, which has been the main driver of economic growth in recent times, fell to a nine-year low in the first quarter of 2013, said Marcus. Pockets were pinched by lower real income growth, electricity and petrol price hikes and higher debt levels.
Inflation rates based on consumer price index (CPI) data from April released this week remained at 5.9%, unchanged from last month, but overshot concensus expectations by 0.1%, according to Investec economist Kamilla Kaplan. And according to Marcus, the drivers behind inflation have changed somewhat. Food price inflation, which had experienced a decline since November 2012, was back on the increase and sitting at 6.3% last month.
"The higher CPI food price increases in April may have reversed the favourable food price developments observed in recent months," she warned. Core inflation, which excludes food, petrol and electricity, measured 5.2%, also saw a marginal increase from 5.1% in March, said Marcus.
In addition to upside risks to inflation, the governor cited other factors such as the growing shortfall on the current account balance of payments; electricity supply constraints; downside risks to growth and employment creation in a context of high unemployment; and declining domestic and foreign investor confidence as issues which could "impact directly on capital flows".
"These developments also have the potential to affect, directly and indirectly, South Africa's credit ratings, and increase the cost of much-needed finance," she said.
Nonetheless, despite the current difficulties, foreign money has continued to purchase bonds and equities this year. Since January, non-residents have been net buyers of equities to the value of R12.7-billion, and bonds to the value of R22.5-billion, said the governor. Although this represents a lower average than last year, it is testament that funds are still flowing in.
And the weakness of the rand could be harnessed to improve the competitiveness of the stagnant manufacturing sector, said Marcus. Provided that gains are not eroded by rising wages and prices, "the weaker rand is expected to result in some narrowing of the trade deficit", she said.