How would an interest rate increase affect you?

[The Duck]

INTEREST RATE HIKES

I believe that what the States are experiencing is being experienced by all Western countries with largely capitalist ideologies . Over the past decade big business has taken over global politics and they generally control economic policy . Governments are mere puppets of global companies allowing them to exploit labour to such a degree that the average individual's disposable income has shrunk to such a degree that more and more people are buying basic goods on credit. Wage increases are kept as low as possible allowing big board directors to report bigger profits to the shareholders so that they can earn that fat incentive bonus.

Economists are not even sure about the policy of increasing lending rates , which I believe forces people at this point to go more into debt. Since the middle of last year the repo rate has gone up by about 600 basis points . Homeowner's with bonds of aprox R 1million are now paying R 2500 P/M more.

In SA the population group that suffers the most are the emerging black middle class who invested in property about a year ago. More and more people are putting their homes on the market because they are battling to finance their bond repayments.

Yes , in short I agree that it will take many years to improve as the big guys will refuse to acknowlegde that the capitalist ideology is the cause of our current problems.

[Dave A]

Every now and then I've noticed we get these posts that lay the blame on capitalism. In most instances it's linked with some specific disaster, such as the sub-prime issue. Whilst rejecting capitalism on a narrow issue is akin to throwing out the bath with the bathwater, I question these protests on a more holistic level.

Here's the problem with these statements as I see it. Capitalism is only a part of any particular socio-economic model. For example, if you are going to condemn capitalism because of the sub-prime issue, you also need to condemn democracy, freehold ownership of property and perhaps even social welfare. Because those were the contributing elements that provided the environment for the problem.

The other question is if we do away with capitalism for our economic model, what would we replace it with - socialism? Now think about that for a moment. What does that mean exactly? When you get down to it, instead of individuals who have carved their ownership stake, ownership now rests in the hands of the state.

Are you that confident that the state will use its ownership position any better than private individuals?

We have enough trouble pursuing balance with economic power sitting in private hands and social power sitting in the hands of elected officials. Can you imagine if both power bases were sitting in the same hands?

[The Duck]

Throwing out the bath with the bath water

Possibly out of my league here - but I am not proposing that we throw out the bath with the bath water. In most healthy economies there is a mix of socialism and capitalism .There needs to be certain checks and balances to stop the haves exploiting the have nots. In my laymans reading of our current situation - people are buying more on credit as their disposable incomes are reducing.

Why ?- because big business is allowed to keep salary increases low in order that they achieve their profit targets. Salary increases in general have lagged behind increases in cost of living. To stop this I believe that government should not allow this to continue and that directors should not be able to qualify for their performance bonus if they achieved it by keeping salary increases low. I have heard that one of the European countries have already enacted a regulation to stop big business .In the current system the rich get richer while the poor get poorer and the gap just gets bigger. A recent news article compared South African executives disposable incomes with other countries and with the exception of the USA our guys disposable incomes were bigger . Interesting...

But listen I am not a business professional I am a mere real estate agent so what do I know? In my simple knowledge I just do not see how increasing the interest rates is going to stop people buying on credit. In my industry people are prioritising their spending - If there is no other avenue they are disposing of assets or getting out of the property game because they are struggling to finance their bonds. So maybe the inner circle should rather focus on reversing the crunch on the average Joe's disposable incomes.

[Dave A]

Possibly out of my league here -

You're definitely not out of your league here. You raise lots of very valid points. In fact I personally agree with every point, except that the culprit in chief is capitalism.

In most healthy economies there is a mix of socialism and capitalism.

Exactly. Done correctly they are not conflicting conditions. There is a healthy balance between social and economic priorities.

More back on point, what do you see as the responsible solutions to the property market crunch?

[Dave A]

I always enjoy reading Bruce Cameron's articles. This latest, tied with The Duck's comment about the '97/8 interest rate hike and the way the property market bled then, had me thinking that perhaps the best thing is to have a full blood-letting.

Only two weeks ago, the potential losses from the crisis were estimated at US$600 billion. This week, they were up to US$1 trillion.

The problem is that the corpses are still being hidden and so it is difficult to assess the full impact of the crisis. One thing is certain: the consequences of the irresponsible lending to people in the US will be felt by individuals around the world, including South Africa, as, like the Black Death of 1347, its effects ripple inexorably outwards.
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The only answer to the sub-prime mortgage debacle is for the full pain of the crisis to be absorbed now - and it will be severe.
full story from Personal Finance here

[duncan drennan]

Brace yourselves for another one...

Speaking to the finance portfolio committee on Wednesday, Mboweni said: "If I was the only member of the Monetary Policy Committee (MPC), I would definitely increase rates in December."

The bank staff's forecast for inflation in the coming months shows inflation increasing above the 6% target for part of 2008 before dropping back into the target range before the end of the year.

He told the committee: "The inflation picture for South Africa is that pressures are on the upside, whether from electricity or vegetables. When the forecasts indicate that inflation is likely to stay above the target, the task of the central bank is to tighten monetary policy."

He said that there was a period recently when the MPC should have tightened rates, but did not do so. "It was an error," he said.

Full article on M&G Online

[duncan drennan]

Next week holds the next decision on interest rates, and I though that this article from FNB economics serves as a good point for starting a discussion.

They discuss Taylors rule,

Taylor's Rule

Estimating where interest rates should be.

According to Taylor's Rule, the Prime Interest Rates should currently be :

(a) "neutral" Real Prime Rate: 5.5%
(average September 1989 - July 1995; 1999 - 2007)

(b) Expected CPIX inflation : 1Q 2009: 5.5%
(metropolitan and suburban areas)

(c) 0.5 x (Current CPIX - CPIX "target'): 2.0%
= 0.5 x (8.5% - 4.5%)

(d) 0.5 x (Output "Gap") : 1Q 2009: 0.0%

Target Prime Interest Rate : 13.0%

Current Prime Interest Rate : 25 January 2008: 14.5%

Take note of the note about how Taylors rule is more suited to efficient economies (i.e. USA, EU) and is typically higher in developing economies.

One of the things that worries me about this analysis is the projected CPIX for Q1 2009 - is that really accurate? I think we may still be in for some inflationary shocks (food, energy) over this year.

Which way do you think the interest rates and inflation are going?

[Dave A]

One of the things that worries me about this analysis is the projected CPIX for Q1 2009 - is that really accurate? I think we may still be in for some inflationary shocks (food, energy) over this year.

They're dreaming. Watch labour inflation this year alone.

[Dave A]

CPIX and CPI up. Now PPI, which tends to lead out CPIX, is up much higher than expected.

South Africa's producer price inflation (PPI) accelerated above forecasts to 11,2% year-on-year in February from 10,4% in January, official data showed on Thursday.
Statistics South Africa said the headline number, representing domestic output, stood at 1,3% on a monthly basis, compared with 1% previously.

Economists polled by Reuters last week forecast that annual PPI would come in at 10,7%, while the monthly rate of increase was seen at 0,8%.

Fanie Joubert, economist from Efficient Group, said: "This number is obviously higher than our expectations, which is quite negative considering that CPI came in par with market expectations yesterday [Wednesday].

"This just gives more fuel to the Reserve Bank to hike rates when they meet again on April 9 and 10."

Mike Schussler, economist at T-Sec, said: "Wow. If anybody doubted the fact that we were heading for an interest rate hike, these doubts are being eroded very quickly. It is a shock to the system and we can expect to keep getting these kinds of shocks for now.

"If we look at the 14% Eskom price hike, never mind the proposed 53% revision, we are looking at a very high PPI of over 15% going forward."
full report from M&G here

Any bets against another interest rate hike?

[Moneymaker]

April being a short month and hence consumer spending will be lower is the only thing that might stall the rate increase.....it's certainly not going to be going down....

[Dave A]

Hands up all those who predicted an increase.

South African Reserve Bank Governor Tito Mboweni has raised the repo rate, at which the South African Reserve Bank lends money to banks, by 50 basis points to 11,5% following a two-day meeting of the bank's monetary policy committee.

The prime overdraft rate therefore increases to 15% and the tightening cycle that began in June 2006 has now reached 450 basis points.

The most recent central forecast of the Reserve Bank indicates a further deterioration in the inflation outlook when compared with the previous forecast, said Mboweni. Inflation is now expected to peak at an average of about 9,3% in the first quarter of this year, and thereafter to follow a downward trajectory.

It is expected to return to within the bank's inflation target range of 3% to 6% by the fourth quarter of 2009.

CPIX inflation had surged through the top end of the bank's 3%-to-6% band and hit a high of 9,4% year-on-year in February.
full story from M&G here

The comments from various economists is interesting - mainly because the focus seems to be on inflation. But I wonder how much of a tipping point the trade deficit had on the decision.

[Chatmaster]

I think this increase is once again punishment towards the consumer due to the poor leadership from government. I also can not see how the increase will lower the inflation rate. People closed the taps a long time ago according to an interview I listened to last week on radio. Also the impact of the NCA is still flowing through the economy. At the current moment there are to many other factors that are dictating the inflation percentage so I think the old strategy of increasing the interest rates are the wrong tool use in our very unique circumstances.

[IanF]

My hope with this increase it will strengthen the Rand. A lot of inflation is exchange rate driven so a stronger rand should help with this.

[Dave A]

South African bond yields jumped on Thursday and the rand was firmer against the dollar after the central bank increased interest rates while local stocks ended in slightly negative territory.

The central bank raised the repo rate by 50 basis points to 11,5%, the ninth increase since June 2006, citing a worsening inflation outlook.

Bond yields surged, with those on the 2010 bond up 23 basis points to 9,72% and those on the 2015 issue up 19,5 basis points to 9,18%.

The rand was trading at 7,78 to the dollar at 3.50pm, 0,94% firmer than its previous close of 7,8540.
full story from Business Report here

With interest rates in the west going down, our interest rate increases become attractive to foreign investors.

What amazes me is Trevor Manuel is still predicting 4% GDP growth.

[duncan drennan]

I really think that it is worth reading the MPC statement. Here are some things which stood out for me:

The inflation outlook is being influenced by a series of supply-side shocks emanating from the international oil and food prices which are posing challenges for inflation-targeting countries in general. Domestically, there is evidence of generalised price pressures and the prospect of further substantial electricity price increases will also delay the return to within the inflation target range.

CPIX inflation has maintained its upward trend, reaching 9,4 per cent in February 2008. Petrol and food prices were again the main drivers of inflation and increased at year-on-year rates of 29,5 per cent and 14,3 per cent respectively. If food and energy prices were excluded, CPIX inflation would have measured 5,6 per cent.

A number of indicators suggest that output growth will be below potential in the coming quarters, although infrastructural investment programmes are likely to underpin the overall growth rate.

One also has too look at all these things in the larger global context. The current asset losses due to the massive financial write-offs of large banks around the world is being compared to 1929 - and that is not something that economists do lightly.

I think in the bigger picture South Africa is certainly doing okay, even if we are being buffeted a bit. Unfortunately the timing of the Eskom debacle has been quite bad. We might have seen even larger foreign inflows if our mines were producing at full speed.

We also have the benefit of large public works programmes (largely for 2010) without which we may have been up the creek without a paddle. But we're not.

I think that both Trevor and Tito have prepared the country well for these challenging times.