How would an interest rate increase affect you?

[Dave A]

The GDP figures for the first quarter are in.

South Africa's economic growth rate slowed to 2,1% in the first quarter of 2008 on a seasonally adjusted and annualised basis, official data showed on Tuesday, citing a sharp drop in mining due to a power crisis.

Statistics South Africa said Q1 GDP on a seasonally adjusted and annualised basis slowed from 5,3% in the fourth quarter of 2007, and was the lowest figure since the third quarter of 2001.

Monale Ratsoma, economist at Absa Capital, said: "It's worse than expected, and the reason for that is a decline in mining production which is reflective of power outages that escalated in January this year. Elsewhere, the finance sector is slowing down and that is a reflection of high interest rates and slowing consumer spending."

Mike Schussler, economist at T-Sec, said he had expected the figure to slow down even more dramatically during the quarter, and felt that "we are lucky to even get over 2% quarter-on-quarter growth".

"These figures make it very unlikely that we will see 4% -- even 3% -- growth this year."
full story from M&G here

[Dave A]

And CPIX for April in at 10.4%

South African Reserve Bank Governor Tito Mboweni said on Wednesday that the task of the central bank is to maintain inflation in the 3% to 6% target band, and with CPIX (consumer inflation less mortgage costs) now at 10,4%, "drastic" measures are required.

"This is way above the upper limit -- you don't have to be a genius to tell interest rates have to tighten," he said.

Mboweni pointed out that if food is excluded from the CPIX, then it is above 8%.

"So you can't just blame food," he said.

He noted that it is also above 8% if petrol is excluded. And if both are excluded, inflation is still above the key 6% mark, indicating broad pressures.

He concluded that things would get more difficult before they get better and that he feels things will only get better "after a lot of pain".
full story from M&G here

I see analysts are speculating we could see a 1% increase in interest rates at the next monetary policy meeting due in two weeks time.

[IanF]

I heard on the news this Morning Tito talking about a 2% rate hike, I take that as it will be 1% so when it happens it doesn't feel that bad.

[Dave A]

Well, to stop the rolling ball, you need to get in front of it. I recall Trader Vic called for a 2% increase sometime last year. It might not be that bad an idea.

[duncan drennan]

I wonder what the right balance is between tightening your belt and suffocating yourself. Tricky one. Now if only the government and business could get on board with this inflation thing.

[Dave A]

If it's stagflation you're worried about, you are not alone.

Inflation data released yesterday confirmed that South Africa is facing stagflation - a combination of slow growth and rising inflation. Statistics SA reported CPIX (consumer price index minus mortgage costs) inflation was 10.4 percent last month, while headline inflation was 11.1 percent.

The news, which came a day after disappointing figures on economic growth, put paid to expectations that CPIX, the Reserve Bank's benchmark measure of inflation, would peak in the first quarter.
full story from Business Report here

By my understanding, government would have to ease up elsewhere to compensate for the fiscal discipline that is needed. My thought is along the lines of softening on labour legislation to encourage employment. Employers might take a few more risks in hiring if they could bail quickly and cheaply if it becomes clear they've made a mistake and need to adjust.

[IanF]

Inflation is here, the paper rep told me today there is a 5% increase in June and another in August. This due to rand weakness and paper price increase overseas. The effects of this will be more increases in paper products. Then to add to it the supply of bagasse (sugar cane waste) is slowing due to land claims, so they will have to use more wood pulp to make certain papers. So it goes.
So be prepared for higher wage demands and so the cycle goes.

[Dave A]

PPI up - and higher than expected too.

South Africans yesterday received shocking news on the economy for the third day in a row. Statistics SA said producer inflation rose to 12.4 percent in the 12 months to April, well above the 11.8 percent forecast by economists polled by Reuters and the upwardly revised 11.9 percent in March.

A major factor in the price escalation for the 12 months to April was the 34 percent rise in petroleum and coal products. With a weighting of nearly 5 percent in the producer basket, this sector contributed substantially to inflation: prices of this category of products rose nearly 5 percent in the month.

Kevin Lings, an economist at Stanlib, said: "This was almost entirely due to a massive 21.1 percent month-on-month increase in coal prices."

Standard Bank economist Danelee van Dyk said this component made the biggest contribution - 20 percent - to overall producer inflation.
full story from Business Report here

[Marq]

Folks came from afar just to see
Two Economists who'd agreed to agree.
While the event did take place,
It proved a disgrace;
They agreed one plus one equals three.

[IanF]

It proved a disgrace;
They agreed one plus one equals three.

I see economics as an art not a science. The one thing that sticks in my mind from my economics course is oligopoly, this just because it is such a funny word.

[Dave A]

I think gov has a sense of humour failure when it comes to oligopolies.

oligopoly: A market dominated by a small number of participants who are able to collectively exert control over supply and market prices.

Unless they happen to dominate that particular sector of course - like electricity supply, fixed line telecommunications, road tolls, taxes...

[Dave A]

I see the trade deficit figures are in:

South Africa's monthly trade deficit doubled in April, capping off a week of disappointing data that looked set to usher in more interest rate increases.

The SA Revenue Service said on Friday that a sharp rise in oil imports pushed the trade balance to a R10 billion shortfall, pointing to further pressure on an already yawning current account gap.

Citigroup economist Jean-Francois Mercier, said: "It is a particularly weak figure. It is way below expectations and ... points to a continued wide current account deficit."

The current account shortfall swelled to 7.3 percent of gross domestic product last year, the biggest deficit in 36 years.
full story from Business Report here

36 years ago - that would be 1972. I wonder why we had such a bad trade deficit then?

[Graeme]

As a retiree living on investments, some of which involve interest income, I personally am delighted at the prospect of a further increase in interest rates!

Bring it on, Tito!

[Dave A]

As we sit waiting to find out how much the next interest rate increase is going to be, here is a story that suggests government should be doing more to reign inflation in.

The government should do more to make the economy competitive as a way to curb price increases, economists urged on Monday. The comments came ahead of today's monetary policy committee (MPC) meeting of the Reserve Bank. The MPC will announce whether the bank's official repo rate will be raised by half a percentage point or more.

Chris Hart, an economist at Investment Solutions, said: "Open economies tend to have lower inflation as competition forces firms to become more productive." He suggested cutting import tariffs further to expose local producers to more competition from abroad. The proposal would be resisted by trade unions, who already blame the liberalisation of the economy during the past 14 years for job losses.

Hart also raised a number of regulatory and policy issues that had allowed certain sectors to be dominated by a single player or a handful of firms.

Dawie Roodt, the chief economist at Efficient Group, described state-owned or partially owned companies, such as Sentech and Telkom, as causing obstructions to growth.

He called for liberalisation of the labour market to allow wages to respond more flexibly to change.

Nicky Weimar, a senior economist at Nedbank, said "a global supply response" was needed to address the high cost of food. "There is a lot of underutilised land in Africa. What is needed is infrastructure and access to better technology and know-how."
full story from Business Report here

Dawie Roodt definitely gets my nod on liberating the labour market.

There is something else here too. Much has been made of the current account deficit, but no-one seems overly concerned because the gap is being covered by capital inflows, right? Well, that might not be the case of late.

The World Bank's Global Development Finance report released on Tuesday said the current account deficits of South Africa, Lebanon, Pakistan, Romania and Ukraine were expected to widen in 2008, noting that in some instances foreign direct investment inflows covered the entire gap.

This did not however apply to South Africa, where FDI outflows have risen significantly.

"In the case of South Africa, FDI outflows are estimated to be roughly equivalent to FDI inflows in 2007, providing no net external financing," the report said.
Full story from M&G here

Yeah. All those emigrants add up.

Playing with the interest rates on their own doesn't look like it's going to cut it this time.

[Dave A]

June CPIX in, and higher than expected again.

Record inflation, reported yesterday, once again raised a question about the merits of the current consumer basket, on which the inflation measures are based. Statistics SA said inflation in the CPIX (consumer price index minus mortgage costs) was 11.6 percent over the year to June.

CPIX is the Reserve Bank's benchmark measure of inflation. Last month's figure is the highest since the index was introduced in January 1998. It topped a forecast of 11.3 percent by 18 economists polled by Bloomberg. The high figure lifted the chances of a further interest rate rise when the Reserve Bank monetary policy committee meets in two weeks' time - after 5 percentage points of hikes over the past two years.
full story from Business Report here

There are suggestions the figures are overstating the real situation and that the new basket to be introduced in January 2009 will reduce the numbers.

André Roux and John Stopford, the joint heads of fixed income at Investec Asset Management, recently suggested that the official rate was 2.2 percentage points higher than the actual rate; other economists have made similar estimates.

The recalculations would put CPIX at about 9.4 percent.

I have to question the direction this new basket is going on some items though. Is the average household really spending a smaller percentage of their income on food compared to 6 years ago? Or fuel for that matter? Remember, this is a basket minus interest type expediture. In cricketing terms, I'd be looking at the video for evidence of ball tampering.

There is one other thing that is being tossed in as "light at the end of the tunnel."

Economists predict a big drop in January, when Stats SA's new price basket is launched, despite electricity price hikes by municipalities over the rest of the year.

This is because the new basket will have a smaller weighting for food, fuel and power - all high-inflation items - and because next year's inflation will be measured off a high base.

*Cough* Wasn't the levels last year a high base compared to the previous year too?