How would an interest rate increase affect you?

[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

[stephanfx]

It is almost 4 weeks ago, any new news pertaining this? Are there any news to support this, I know the petrol has gone up now, and that a interest rate hike is immanent, but is there any indication as to when maybe and how it will affect businesses in general?

[duncan drennan]

The MPC meets every two months (meeting dates for this year). We'll have to wait and see what the changes are to the inflation outlook at the next meeting. As to the effects, well, that's hard to gauge � not even the economists can agree

[Dave A]

This article is not very encouraging in terms of short term prospects on interest rates.

Borrowers will almost certainly be disappointed in their hopes that prime and mortgage rates will peak at their current levels of 13 percent.

Rates in both money and bond markets are pointing to prime at about 13.5 percent by the end of the year - in line with the Reuters' consensus forecast of 11 of South Africa's top economists, which put prime at 13.5 percent in the third quarter, before a decline to 13 percent in the second quarter of 2008.

One important pointer is the difference between the yield on the benchmark R153 bond and the inflation-linked R189 bond, which measures inflationary expectations.

This differential was currently 620 basis points, said Ian Cruickshanks, the head of Nedbank Capital's strategic research unit.

In other words, the bond market expects inflation to remain above the ceiling of the Reserve Bank's target range of between 3 percent and 6 percent, which increases the probability of a further rate hike.

The central bank raised its rate by 250 basis points to 9.5 percent between June last year and June this year, in an attempt to prevent its benchmark CPIX (consumer price index minus mortgage costs) breaching the ceiling.

If CPIX inflation remains above the ceiling, more hikes will be needed to rein it in.
full story from Business Report here

I do hope that some official numbers emerge before the next central bank meeting that might indicate the extent of the NCA impact.

[Graeme]

You will all be familiar with developments in the US “Sub-Prime� market - where irresponsible financial institutions have been dishing out mortgage finance to very poor credit risks, with these people now starting to default on their loans; over a million to date, and rising fast.

One of the many advantages of being retired is being able to watch TV in the afternoon (morning in the USA) and watch news there as it develops. I have watched Bernanke (Chairman of the US Federal Reserve) giving testimony before Senate House Committees on several occasions lately and whilst he has been very careful not to frighten the capital markets, some of what he has said about the sub-prime market, or rather what he has not said, is beginning to fill me with unease. These things always start slowly but when panic sets in a small trickle of stones can become an avalanche very quickly.

There is little reason why increasing American loan defaults should trouble us unduly in SA; our biggest trading partners by far are the EU and the UK, but it is a fact that unease in the USA can cause a sharp intake of breath on capital markets here.

If I were in business instead of sitting at home and watching my investments, and if I were in the process of arranging development capital finance right now, I would be inclined to try to get it all signed and sealed at a fixed interest rate chop-chop, and I would not be taking on any loan servicing commitments that I was not very confident of meeting.

I’ve been investing money for forty years now and believe me, history repeats itself with monotonous regularity. I’ve seen this all before. I’m not doing any drastic re-arrangements right now, but I’m not touching any risky stuff either. Caveat emptor!

[Dave A]

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

And it starts with Wall Street while we slept.

As you have said to me so often - fundamentals.
You're getting better at reading the timing on these calls, Graeme.

[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....