How would an interest rate increase affect you?

[Dave A]

I think the crunch was around when the finance was applied for/granted. Quite often the actual credit extension comes later. (About the only reason I can think of off the top of my head).

[duncan drennan]

The other thing that I thought might be a factor is that not as much money as expected is actually affected by the NCA. Those borrowing large amounts of money probably have net asset values over R1mil, and the bulk of the money may be going to juristic persons. Not sure, we'll have to watch the numbers over the next couple of months.

[duncan drennan]

Based on the banks' actions it looks like we're heading for a further 100 basis points increase.

Banks expect interest rates to rise in the short term. They are currently paying nearly a percentage point more for 12-month funding than they are for three. This indicates that they are expecting two more 50 basis point rate hikes, says Coronation (JSE: CML) money market manager Tania Miglietta. Either that or there is a need for money available for that time horizon.

Banks are paying 10,8% for 12-month negotiated certificates of deposit (NCDs), which is a significant premium over shorter-term NCDs. This means that if interest rates don’t go up, they might have a squeeze on their profit margins, because they will be paying a higher price for money, but will be lending it at an unchanged rate.

Full article on MoneyWeb

[Dave A]

Or they could just jack up their base rates anyway. I don't think banks are obliged to set prime based on the Reserve Bank's rate.

[duncan drennan]

Tito has pretty much indicated that we should expect a rate hike, but I found this comment really intriguing, and I wonder how much it would impact on the SARBs next steps,

"Should interest rates go higher" we "might see lots of insolvencies," Mboweni said. "We'll see lots of repossession of cars, houses, which we don't want to see."

Full article on MoneyWeb

And on the lighter side, George Bernard Shaw's view of economists, "If all economists were laid end to end, they would not reach a conclusion."

[Dave A]

"Should interest rates go higher" we "might see lots of insolvencies," Mboweni said. "We'll see lots of repossession of cars, houses, which we don't want to see."

Nice to see some concern for the state of the voters in all this. But he has his mandate - an inflation target.

It's going to be up to government to make the hard decisions if they're going to rein inflation in without beating us to a pulp with the interest stick.

[duncan drennan]

Fascinating!

23% of homeowners (aged 21+) have heard the phrase 'mortgage loan' and know what it means. 40% have heard the phrase 'interest rate' and know what it means. (FinScopeTM 2006)

From Eighty20's Fact-a-day

@Dave: I see they have a javascript thingy for adding to websites

[Dave A]

@Dave: I see they have a javascript thingy for adding to websites

Hmm. Nice. But where to put it? The news headlines page?

Maybe we should hunt down a few similar "goodies", such as Quote a day and that sort of thing - then we could set up a seperate page.

[Marq]

the phrase 'mortgage loan' and know what it means

Do they really know???

Mort = Death; gage = pledge or I prefer the more obscure = grip

So very apt - mortgage = death grip

Start a fun page of useless information and dinner table discussion items!

[duncan drennan]

Well, yet another 50 basis points (here is the full statement of the MPC).

The MPC identified a number of risks to the inflation outlook and is of the view that these risks remain on the upside

I'm casting my mind back a while to this post, where Trader Vic was calling for a 2% hike. What where the rates back then, and have we moved up 2%? I think so.

I wonder how different the current economic environment would have looked if the hike had been a shock, rather than a gradual one?

[Dave A]

I see the general analyst sentiment is that the increase was unexpected. Goodness knows why. The narrow mandate of inflation targeting made it entirely predictable.

Tito and team have been consistent. They may have debated other factors, but the deciding factor for them is the inflation rate. And until that mandate is broadened, they don't have the space to maneuver.

At least everyone seems to agree that the economy is cooling off.

[duncan drennan]

I’ve been investing money for forty years now and believe me, history repeats itself with monotonous regularity.

Graeme, I'd be interested to know what your thoughts are on the markets movements yesterday....

[Graeme]

The great sub-prime mess

I don't think we will see the end of the repercussions for months, or even years, but life goes on and already the equity values of the sound companies upon which the world economy depends are returning to their former values; except,of course,for many banks.

The bail-out of the banks was vital, and was handled very well. We could feel that the banks should have been severely punished for what they got up to, but that could have been ruinous to many countries' economies.

As far as interest rates are concerned, I don't believe that the answer to inflation necessarily requires an interest rate squeeze - there other ways of cooling off the banks' lending, one of which would be to increase the amounts that the banks have to have on deposit with the Reserve Bank. The horrid thing about interest rate increases is the way that ordinary mortage holders get squeezed and business suffers. Economists are far from convinced that inflation may only be controlled by interest rate escalations.

[Dave A]

Business conditions are clearly tightening. The following two stories give hard evidence of tough times ahead.

The Gauteng economy is slowing down as several industries experience a drop in business-activity levels, said the Gauteng Business Barometer (GBB).

Spokesperson Mike Schüssler said the GBB for September dipped by 7% to 140 index points when compared with the same month last year.

Schüssler said: "The index also shows a marginal 0,1% decline when compared with activity levels in August.

"September's performance echoes a continuing downward trend from the beginning of the year, mainly due to higher interest rates and inflation," he said.

According to the GBB, the Gauteng economy is feeling the strain due to the higher interest rates.

Schüssler said: "The GBB has foreseen the slowdown and negative effects of higher inflation and interest rates.

"Several sectors such as the broad trade and manufacturing sectors remained strong, but some sectors, like the financial and business-services sectors, experienced significant declines in activity levels," he said.

GBB's economic stress index shows a decline in the province's economy, from 5,6% in September last year and a 1,3% decline when compared with August.

"This means business conditions are becoming less favourable and that businesses should look at other opportunities to boost income levels," said Schüssler.
full story from M&G here

And then an indicator from the motor industry.

New vehicle dealers are under severe pressure because of a steep downturn in retail car sales which is expected to lead some to close.

Eric Scoble, the chairman of the National Automobile Dealers' Association, said yesterday that sales figures from the National Association of Automobile Manufacturers of SA (Naamsa) created a misleading picture of market conditions.

Scoble said dealer passenger vehicle sales reported to Naamsa last month were the worst since December 2004, comprising only 23 000 units out of a total market of 32 257 passenger vehicles reported.

The figure was 19.9 percent lower than in September 2005 and 20.1 percent lower than September last year.

Scoble said the non-dealer market, comprising sales to car rental companies, fleets and the government, along with manufacturers' internal fleets, had concealed the true dealer picture.
full story from Business Report here

I see major consequences ahead. Growth is desperately needed for the transformation that government desires. And we look to be heading in exactly the opposite direction.

[Dave A]

I don't think we will see the end of the repercussions for months, or even years,

You're not kidding. Some big dominoes are starting to look shaken.

Fear and mistrust gripped Wall Street on Monday after Citigroup's CEO quit in the wake of mounting credit losses and an influential money manager called the subprime mortgage market a "$1-trillion problem".

Charles Prince's resignation from Citibank on Sunday -- the second high-profile Wall Street CEO ousted in less than a week -- came as the largest United States bank said it will write off as much as $11-billion in losses tied to subprime mortgages.

US stocks followed European shares lower, while safe-haven bonds rallied and even the downtrodden dollar ticked up as skittish investors wondered which bank might be the next to disclose substantial losses.

Prince's departure came just days after Merrill Lynch & Co CEO Stan O'Neal was kicked out following an $8,4-billion write-down.
full story from M&G here