Bad news for interest rates in South Africa

 ·17 Oct 2022

The ongoing strike at Transnet that has crippled South Africa’s export capacity makes it seem more likely that the employer will buckle to worker demands for higher wages, says the Bureau for Economic Research (BER).

But implementing above-inflation wage hikes will put increased pressure on the national budget and inflation, the group said, which makes another massive interest rate hike in November by the South African Reserve Bank (SARB) a likely outcome.

Inflation will be in focus this week when Stats SA releases the CPI data for September on Wednesday. Absa forecasts headline inflation to have slowed for the second successive month to 7.4% y/y in September from 7.6% in August, mainly due to further easing in fuel inflation to 34% y/y in September from 43.2% y/y in August, shaving 0.4pp off headline inflation.

“However, we expect this to be partly offset by higher food inflation, which we forecast to rise to 11.8% in September (August: 11.3%). Meanwhile, we project that core inflation rose by 0.1pp to 4.5% y/y in September partly due to higher housing costs and medical health insurance,” the financial services group said in a morning note.

That said, this September release will contain more new price information than usual, it said. In addition to the quarterly survey of housing costs (with a weight of 16.5% in the CPI basket), domestic workers’ wages (2.5%) as well as taxi, train and bus costs (2.1%), this September release will include an out-of-cycle survey of medical health insurance (with a weight of 7.1%).

“This introduces higher-than-usual risks to our core CPI inflation forecast, said Absa.

Workers at Transnet meanwhile, have downed tools for over a week, demanding a wage hike of at least inflation (over 7%) along with non-retrenchment clauses and back pay. Employers have offered an increase of 4.5%, which has been rejected.

The damage caused by the strike is huge, and losses are mounting.

The Minerals Council estimates that the strike is costing bulk mineral exporters R815 million in foregone revenue per day as they are unable to rail and load 357,000 tonnes of iron ore, coal, chrome, ferrochrome and manganese onto ships daily.

In addition, the offloading of crucial imports, including medical supplies and diesel, has come to a standstill, raising anxiety about shortages the longer the industrial action continues.

The South African Association of Freight Forwarders (SAAFF) has warned that if the strike continues for another week, groceries at popular retailers like Woolworths, Pick n Pay and Checkers will start to “diminish rapidly” – and if it continues for a week more, then motorists will also start having problems at petrol stations.

These pressures make it ever more likely that Transnet will buckle, the BER said, noting that the government has already hinted that it will step in to help the group financially.

“If brought about by a multi-year deal of above-inflation wage increases, the end of the strike will also have consequences. Here we are not just referring to the direct hit to Transnet’s embattled finances but also how the SARB will view such a settlement,” it said.

While SARB is unlikely to respond to a single wage deal, the BER said that it is starting to see an emerging pattern where firms/industry bodies sign multi-year wage deals that are above the expected rate of inflation.

“This is presumably done to ensure the future stability of operations, as well as in response to increased living costs. Assuming that affordability criteria are met, this seems rational from an individual firm perspective.

“However, especially if not accompanied by productivity improvements, it will raise alarm bells at the SARB, which is focused on managing inflation expectations down to 4.5%, and lower, over time,” the group said.

Given the destruction caused by the Transnet strike, the BER said that it now seems possible – likely even – that Transnet will offer workers a multi-year wage deal that could reach increases of 6% in future years.

Last week, the Automobile Manufacturers Association went even further, agreeing a three-year deal that will see wages increase by 8.5% this year, followed by a likely 7% rise in the following two years.

Mining firm DRDGold also reached an agreement on a three-year wage deal well above targeted inflation.

“Along with sustained US dollar strength and further near-term aggressive US central bank policy rate hikes, the recent elevated wage settlements in South Africa mean that the SARB is now expected to hike the policy interest rate by another 75bps at its November monetary policy meeting,” the BER said.

Read: South Africa a week away from a food, petrol and deeper load shedding crisis

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