How would an interest rate increase affect you?

[I Robot]

It has to come one day - an interest rate increase.

Fin24 raises the issue of debt levels and our ability to deal with it in an article today. The bit that got me was this:

The household debt-to-income ratio of South Africa rose from 49.1% in the final quarter of 2002 to 65.5% in the corresponding quarter of 2005.

And that got me thinking - how ready are we for this day.

There is no doubt that a lot of people are leveraged to the hilt, and will get seriously hit by even a small move. And probably the folks that will get hurt the most are businesses with unsecured debtors - mainly small business.

So are you ready for the day or do you think it'll never come?

[Dave A]

Is crunch time coming. According to this story on Fin24, we might know quite soon.

[AndreMorgenrood]

It certainly will hurt

It will hit me personally, my business, and the amount of money people have available will dry up hitting my business even harder.

But I suppose "The Writing's on the Wall" as they say.

Andre'

[Marq]

My economic development friends reckon we will be let off the hook this time round, but they expect half a percent next time and one before the year end.

It has to come - the only question is when. Prior to talking to these friends, my thoughts were that we will see the first hit now.

These guys have two doctorates and three masters between them on this subject of economics and it still anyones guess - Hope your gearing is in order. Good Luck Andre - hold tight.

[Marq]

You know why we have economists out there??

To make the weathermen look good!

[Dave A]

Good one Marq

[THEUNIS]

You guy's are right even if you are prepared for it it still hurts, we have just had another feul increase and this does not do us any good in the service industry as when funds dry up we tend to suffer first.
I am sure that there are going to be some very sad people out there that have over capitalised. This will effect the ecomomy even further.

[Marq]

I have fired the economic side of my friends I was speaking about earlier. From now I will just discuss philosophy with them (well they cannot be wrong there - can they?)

In the meantime - batten down the hatches and tighten the buckles - the first hit is here.

[Candy Bouwer]

I have fired the economic side of my friends I was speaking about earlier. From now I will just discuss philosophy with them (well they cannot be wrong there - can they?)

Hey Marq, maybe you would also like to air your views in the business philosophy forum. The thread tapered off on "Cognitive dissonance"
Candy

[Dave A]

To a certain extent we can be relieved that they took action now.

The committee has been accused of being slow to react in the past, particularly when everyone was saying the rates should go down. The writing was on the wall (I hate being right this time). The currency dip was just a bit worse than usual, a persistent trade deficit, growing personal debt approaching alarming levels, a multiple whammy that could not be ignored.

The longer they let it slide, the more acute the pain is going to be.

The economists siding against a change was probably the clincher

That half point is going to dampen down even further a few sectors that are already off the boil. The next quarter is going to be interesting.

[Marq]

Haha - Post decision studies of what should have happened - an exact science. This is the haven of the economist, who will now tell us what will happen in the next quarter to interest rates despite the fact that they completely got it wrong this past quarter.

Ok so lets leave these sorry econmists alone now and put in our own thoughts - I reckon the interest rate will stay the same next quarter and go up 50 points the following. this is based on the same reasons they gave today for the increase. I do not see much change happening over the next 6 months given the current world scenarios.

This is of course unless Iran develops their uranium enrichment story faster, causing a gold rush or one of these briliant politicians in our midst here say something more stupid than they have done already. We still have Zumas story and the fall out to happen as well in this period. The world cup should take their eyes off the ball for now.

Given all that - what say you all? We can take a poll or bets - or a poll to bet?

[Dave A]

Gave up gambling years ago. I'll be happy to post a calculated guess closer to the time.

Although....

Can I bet that the economists will be wrong again?

[Dave A]

It's coming up for the next round at the Reserve Bank.

My feel at ground level is that the increases have caused a dramatic cooling off - so I'm going to guess that Tito will do the right thing and keep rates unchanged this time.

[Dave A]

An interesting call from Trader Vic, once again suggesting that a 2% dose of pain is what is needed. I'm posting this on this thread, noting that at the time of the first post, there was not many who thought that an interest rate hike was even on the cards, let alone desparately needed. How quickly times change.

A LARGE DEFICIT on the current account of the balance of payments in the past always worried me as an investor in listed shares. There was too close a correlation between the direction of the deficit and the price: earnings multiple at which the shares were trading.
Even just the turnaround of a surplus on the current account to a deficit in the past caused a fall in the p:e at which shares were trading. Of course, the fall of a p:e means that share prices fall.

South Africa not only has a large deficit on the current account of its balance of payments but in the fourth quarter of 2006 the country also had a huge, unhealthy, structurally dangerous, unprecedented - and call it other names if you like - deficit of an annualised R143bn, or 7.8% of SA's gross domestic product.
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The student who wonders why there's a correlation between the current account deficit and share prices would be well advised to take a look at the latest SA Reserve Bank Quarterly Bulletin. The table on page S 124, which deals with the financing of gross capital formation, shows that SA's gross capital formation was R350bn last year. However, the country's gross savings were only R239bn.

Investment therefore exceeded savings by R111bn - exactly equal to our balance of payments current account deficit for that full year. In 2006, that deficit was comfortably covered by the inflow of all kinds of capital.
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My longstanding fear of a current account deficit and its effect on share prices rests on the simple supply-and-demand principle. Investment can't exceed savings forever, especially not at 7.8% of GDP.

Savings - specifically, personal savings - just have to increase from the current negative levels. That can only happen if personal spending is lowered. And for that drastic measures are required, such as a significant increase in interest rates.

Trader Vic asked Mboweni as far back as April of last year for a two-percentage point increase in the repo rate. So far, we've had two little steps of 0.5 percentage points each.

The time has come for a full percentage point increase in the cost of credit. It's now necessary for the new class of consumer who has only recently discovered the wonderful pleasure of plentiful credit - and also the rest of the interest cycle - to learn about the pain of rising interest rates.
full story from Fin24 here

[Marq]

Balancing budgets

I think we are going into a period where the inflation rate is going to increase, (well more than the reported numbers) taking away the savings part of the economic equation solving the credit part of the equation as the squeeze comes and the interest rates will stay put or be increased slightly as per last year.

With Municipalities crying for more as they battle to balance their budgets ( I thought Durban was strong, but the latest news tells me otherwise) Deficits being mentioned, the rand coming under more pressure, Pick and Pays prices increasing daily (I shop there daily and can no longer believe the inflation stats being thrown at us) - The average salary is not going to sustain the private sector for much longer. Spending on credit becomes a survival tactic rather than a convenience and interest rates take a back seat as Mr average battles to balance his own books never mind the country's books.

The Investment side of the equation now shifts to the rebuilding of infrastructure that has been left to decay over the past ten years. The Government reports a great sense of achievment as the growth rate hits an all time high and Mbeki denies that there was ever a problem in this area in the first place.