Rates.....wooopy

[QUINN]

Hi fellow homeowners
The relief we have been hoping for has finally come………the Reserve bank has decided to leave rates unchanged and this could not have come at a better time.

We all have been struggling to pay our bonds and other debt, now is the time to re think you financial situation, clean house and get things in order.
I personally believe we are at the end of the current rise cycle of the rates so now is the best time to start consolidating some expensive debt.

I predict rates will come down in the third to fourth quarter.
Any other predictions...........or hopes?

[Dave A]

Apparently the decision was made with less than a five minute discussion.

With all the other harmful stuff flying into the mix, it is a small mercy. But the fact that there was so little discussion is a rather ominous portent of where our economy really is right now.

Quinn, I hope you're right about interest rates going down soon - but CPIX is still rising!

[IanF]

I agree with Dave Inflation rising Rand weakening and this Eskom thing will push up inflation so rates will go up. My paper rep spoke to me and said SAPPI have suffered big time it costs a fortune to retstart a paper line and their will be shortages. So price will go up!

[duncan drennan]

Personally I think rates are set to climb in the year ahead. The decision today makes absolute sense. The country has been knocked far too hard by the energy crisis, and I don't think Tito likes to kick a man in the balls.

[Chatmaster]

I think it will remain unchanged for a while still. The energy crises are not going to be resolved soon and it will play a major factor in the rate hikes for a number of months. However it will also cause inflation to rise maybe putting the Reserve bank in a very difficult position. The irony is that no matter what Tito does, rate hikes will certainly not solve the inflation issue atm, so it is a tough call to make.

[Dave A]

Probably the key lies in the credit growth figures. If credit extension continues to grow, I'm pretty sure we'll see an increase in the repo rate. If credit extension goes down, Quinn's hopes might be realised.

[QUINN]

Apparently the decision was made with less than a five minute discussion.

With all the other harmful stuff flying into the mix, it is a small mercy. But the fact that there was so little discussion is a rather ominous portent of where our economy really is right now.

Quinn, I hope you're right about interest rates going down soon - but CPIX is still rising!

I could be wrong but my opinion is that Rates is the wrong tool to fix inflation.

[duncan drennan]

I had a look at some of the figures and projections, it seems like they expect inflation to peak this quarter, and be within the 3-6% band by late this year (they = reserve bank and reuters consensus).

Maybe Quinn is right - with all these power outages and business losses, who is going to have any money to drive inflation?

I could be wrong but my opinion is that Rates is the wrong tool to fix inflation.

What tools do you suggest?

[Chatmaster]

I could be wrong but my opinion is that Rates is the wrong tool to fix inflation.

I have to agree with you Quinn. I am by no means a financial guru, but that strategy was effective in the days the economy was less automated. Getting debt now is an automated process and actually reversed the laws of economic growth. Debt has become a natural way of living and I cannot see that changing soon. Less and less people are saving, debt is available anywhere, even at your favorite grocery store. Even the way that debt works has changed and it has become much more expensive to lend money or buy furniture than years ago.

The rules has changed simply because the freedom to provide debt has been made much more dynamic. I remember a time when I had to meet the bank manager for a small loan of R1,000 to buy tires for my car. Now that is automated with less human interaction and increased risks but higher frequency. The rules has changed dramatically but the same rules are applied by the reserve bank to keep inflation targets. This strategy should be reviewed.

I also like to add that there seems to be an issue with the way inflation gets calculated as well. The real inflation is properly closer to 15% or 20% than to 6% if I look at my current monthly expenses compared to last year this time.

[Dave A]

The key to managing inflation is managing money supply - at least that's the theory.

I think whether CPIX should be the indicator used to manage a target is open to debate. As Chatmaster points out, if we take a more representative basket, inflation is running significantly higher.

What has happened is we've fostered a culture of living in debt rather than accumulating savings. I see two factors that have driven this - the rapid rise in property values and an interest rate on savings lower than the inflation rate. Together, these two factors penalise a culture of savings and makes living in debt a more viable option to generate wealth.

The trouble is from time to time the wheel turns. Something throws a wobble into the cycle and suddenly people who were using debt to leverage wealth find all that leverage working against them instead of for them. And they don't have a reserve to absorb the bump.

The current wobble was started with rapidly rising fuel costs (which was when I started predicting an interest rate climb was imminent). From there the dominoes started falling as the more vulnerable segments of the market got squeezed. And in turn started knocking over the next layer above them. As Graeme has said elsewhere - it's all fairly predictable because it has all happened before.

I suppose if one day a new pattern is to emerge, we need to experiment a bit with new ways of dealing with these downturns. But I don't hold much hope of a successful new strategy emerging whilst our Minister of Trade and Industry is still in denial.