How would an interest rate increase affect you?

[Marq]

Economists

and that is not something that economists do lightly.

I believe that's half the problem in this world of today. Too many economists are being listened to and they all believe they are experts in the science of finance.

This may explain it better.

"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today."
~ Laurence Peter (1919 - 1988), Canadian educator

The other half of the worlds economics problems........glad you asked. Did I mention economists with theories about what could would might happen if this or that happened.

Have you seen any finance guys being interviewed on how your finances are being affected or any business type people being interviewed on their theories as to whether business with be affected.

All we see are politicians and economists with a TOE from lightbulbs, electricity, water to whats in your wallet but have any of them been correct. We hear - see I told you so.......or......well it could have gone the other way if only bla bla bla.

Ok so seeing as this is bash the economist day - why did they invent economists?
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To make the weathermen look good.

[Dave A]

And inflation keeps marching on up.

South Africa's targeted CPIX (consumer inflation less mortgage costs) rate jumped to a new five-year high of 10,1% in March, beating forecasts and hardening expectations for another interest-rate increase.

Statistics South Africa said the targeted measure jumped from 9,4% in February to its highest level since December 2002, and climbed 1,6% month-on-month.

The all-items consumer price index (CPI) increased by an annual rate of 10,6%, compared with 9,8% previously.

Analysts said the strong numbers showed there was room for more rate hikes, adding to nine 50-basis points increases since June 2006, the latest of which was announced earlier this month.
full story from M&G here

Marq, you are really getting vindicated. I can only guess economists don't do their own shopping or tank up their own cars with fuel.

"I think we're quite surprised by how strong it's actually come in," Russell Lamberti, economist at market analysts ETM.

Another economist, Mike Schussler from T-Sec, said: "The nightmare continues. Inflationary pressures are growing. This is way above my expectation."

[duncan drennan]

I quite liked the way that Cees Bruggeman summed up the SARB's current predicament.

It has been clear already for many years that the SARB considers itself a national team player, alongside government, labour unions and business.

And as long as everyone whistles from the same song sheet, everything should be fine with the nation.

In particular, inflation expectations should remain contained and the SARB can keep interest rates low and supportive of growth in the economy.

But if the other team players do not play the game as it is supposed to be played, the SARB is apparently left no choice but to play the heroic role history has allocated it, and that is to defend the nation at all cost against raging inflation.

For otherwise what is happening next door in Zim could easily also happen here, 165 000% inflation and all that, and this would clearly never do.

With few currently playing the game as it should, and the SARB running the risk of eventually becoming blamed for losing the fight against inflation, the Governor appears ready to give battle, apparently even at the expense of economic growth, for such are the stakes.

Put differently, everybody can’t have their own agendas on cross-purposes with the SARB, and letting the SARB get blamed for losing the inflation fight.

[duncan drennan]

Let’s assume our annual productivity gain to be somewhere in the zero to 3% range (zero for some, and up to 3% for others, with an average of 2%). The SARB’s inflation target suggests underlying unit labour costs should increase at most by 5%-6%. Adding back the productivity gain suggests wage increases of 5%-9% maximum.

Those with zero productivity gains (there are many) shouldn’t qualify for 9% wage increases, while those with 3% or better productivity gains shouldn’t get wage increases of as little as 5%.

Yet guess what happens in an economy pressed to the edge of recession, if not into it?

The most productive workers in the private sector carry the full brunt of economic slack, more competition, losing jobs, and working for employers under enormous pressure to contain costs.

Chances are excellent those workers will be made to work harder, improving productivity, yet getting only a small low single-digit wage increase.

But the public sector and hangers on, where productivity gains are rather low, may well just refer to June’s CPIX number and claim an 11% increase (after allowing for at least a 0.5% real gain).

These are confusing realities in a system which shouldn’t be demanding more than 7% average wage increases this year. Yet the targeted average is already 8.5%, with skilled professions suffering shortages easily requiring more. And that is with CPIX of 10% in mind. What is looming is the inflation bulge taking us over 12% if Eskom’s 60% tariff hike materializes and oil and food prices still rise further.

Read the full article on FNB Economics

How do we marry the rising pressure of inflation (and interest rate hikes) with the inherent requirement of keeping labour and price increases below the required target?

People are looking for a "living wage" and want higher increases, but don't seem to link that with the required increase in production.

The problem with wage increases which are higher than the increase in productivity is that they directly drive inflation. You get exactly the same thing (1 worker producing x amount) but pay more for it.

[Dave A]

I think an underlying problem is that wage increases are being costs driven (as in living costs for the labour) as opposed to value-add driven (a number proportional to the contribution made to the company's overall production and effectiveness).

So we have wage increases which are justified on the employees' personal expenses model, but the business has to finance this from a value-add driven model - the only way they have a business in the first place. When the two systems get out of synch, we have problems.

[duncan drennan]

So we have wage increases which are justified on the employees' personal expenses model, but the business has to finance this from a value-add driven model - the only way they have a business in the first place. When the two systems get out of synch, we have problems.

Not just that, but it is out of synch with inflation targeting. Wage increases (and also company price increases) based on a personal expense model lead directly to the so-called second round inflation effects. The reserve bank basically has one tool and that is interest rates. Raise interest rates to combat inflation, which pushes up personal expenses again. And so we go on the merry-go-round.

[Dave A]

Not just that, but it is out of synch with inflation targeting.

Food and fuel inflation is what is really throwing the balance out. And perhaps to some extent the credit crunch.

I was thinking though - the one thing the higher interest rates are doing is supporting the Rand. Given the pricing pressure on fuel (for example) is external, that does help directly.

[Dave A]

Knock me down with a feather. This is rather unexpected.

South African private sector credit growth jumped to 22,62% year-on-year in March, knocking expectations of a slowdown in spending and hardening the case for more interest rates increases. Central bank data on Wednesday showed growth in demand for credit leapt from 20,79% in February, while M3 money supply growth edged higher to 21%.

Analysts said the data, following hard on the heels of strong inflation numbers last week, would push the Reserve Bank towards further monetary policy tightening.

"Nobody is going to like this. Everyone was hoping for lower figures," Brait Merchant Bank economist Colen Garrow said.

"This gives the Reserve Bank ammunition for a rate hike at their June meeting. The numbers should have slowed down much more."
full story from M&G here

[Karenwhe]

I don't know when the poll was put up, but I think if you put a new poll up if the interest rates go up again (which is highly possible), you would get completely different results.

Then you can compare how many points increase (from first poll to now) change the answers and how severely or not... have they changed in the period.

Just a thought.

[Dave A]

That poll went up 12 May 2006.

Yeah! I think the results would be very different now

[duncan drennan]

That poll went up 12 May 2006.

Wow. It is actually quite amazing. This forum and community has been around for about two years now, and just keeps growing and getting stronger. And this thread has been around just about the whole time. Loving it.

[Dave A]

I see the first post ever was 4th May 2006 by Alan - so I guess that's our opening day.

It certainly is a very different place to what went up that day.

[Dave A]

Reserve Bank Governor Tito Mboweni said on Tuesday rates would rise further if it was up to him and inflation targeting would remain.

Mboweni was speaking after the release of the bank's Monetary Policy Review, in which the bank said it was committed to bring inflation back into its 3 to 6 percent target band within a reasonable amount of time.

Communists and labour allies of the ruling ANC said on the weekend they would push for a review of inflation targeting, blaming the strict adherence to the policy for a 450 basis points rise in interest rates since June 2006.
from IOL here

[Karenwhe]

About reserve banks....

You may want to see this..... it is a bit off topic, though not much

http://www.youtube.com/watch?v=_dmPchuXIXQ&feature=related

If the link does not come right, go to youtube and type in: Zeitgeist - The Movie: Federal Reserve (Part 1 of 5)

[Dave A]

Oh BS! That video's theory is constructed on a fundamental flaw. The central bank only charges interest on credit extended, not on every note of currency it issues!