How would an interest rate increase affect you?

**Marq** · 08-Jun-06, 09:04 PM

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** · 08-Jun-06, 09:15 PM

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** · 30-Aug-06, 10:59 AM

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** · 27-Mar-07, 11:46 AM

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.

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.

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

**Marq** · 27-Mar-07, 12:15 PM

I think we are going into a period where the inflation rate is going to increase, (well more than the reported numbers) taking away the savings part of the economic equation solving the credit part of the equation as the squeeze comes and the interest rates will stay put or be increased slightly as per last year.

With Municipalities crying for more as they battle to balance their budgets ( I thought Durban was strong, but the latest news tells me otherwise) Deficits being mentioned, the rand coming under more pressure, Pick and Pays prices increasing daily (I shop there daily and can no longer believe the inflation stats being thrown at us) - The average salary is not going to sustain the private sector for much longer. Spending on credit becomes a survival tactic rather than a convenience and interest rates take a back seat as Mr average battles to balance his own books never mind the country's books.

The Investment side of the equation now shifts to the rebuilding of infrastructure that has been left to decay over the past ten years. The Government reports a great sense of achievment as the growth rate hits an all time high and Mbeki denies that there was ever a problem in this area in the first place.

**duncan drennan** · 27-Mar-07, 01:02 PM

There are definitely inflation pressures which are building - of which food probably has the greatest impact on average households. You can have a look at the PPI figures, which tell a very different story to the CPIX figures.

The reserve bank's mandate is to keep inflation in the 3-6% band, and so far Tito has shown himself to target this just about exclusively. I think that is a good thing. If you look purely at the CPIX projections, there should be a downward trend over the year ahead.

The thing which we can't handle are shocks to the system, like an oil price spike, but I do feel that Tito has slowly been trying to stack the odds in out favour, rather than follow a dramatic interest rate shock, like Turkey. I suspect we're going to see another 0.5% increase, which will pressure people, but will not have the dramatic psychological impact that a large rate hike would have. I think that small, continuous rate hikes are better.

If you have a look at the figures for PSCE, you'll also see that it has been rising - mainly driven by company borrowings. To jump the interest rate would have a significant impact on the growth goals of the country, which could lead to a negative cycle of investors taking money out of the country, rather than putting it in, taking away our ability to fund the trade deficit.

Tough one to balance. I'm in favour of a further 0.5% increase.

EDIT: also have a look at the correlation between CPIX, and PPI, particularly around the time we had about 12% CPIX

**Dave A** · 27-Mar-07, 03:53 PM

Without even looking at the numbers, I definitely feel that hard liquidity is dwindling. I base this on clients being more price-sensitive and on average slower to pay.

**duncan drennan** · 27-Mar-07, 04:41 PM

Originally Posted by Dave A

Without even looking at the numbers, I definitely feel that hard liquidity is dwindling. I base this on clients being more price-sensitive and on average slower to pay.

Do you think interest rate hikes, (i.e. further "dwindling hard liquidity) will result in more savings, or more debt servicing? (on a consumer level, taking your recent case into account)

Maybe to phrase it a different way, do people really change their lifestyle when faced with what is effectively a lower income? It does catch up with you eventually though....

**Dave A** · 27-Mar-07, 06:53 PM

Faced with dwindling disposable income, the tightening of belts is not much of a decision.

The trouble is that high interest rates reward the "haves" and puts the "have nots" in difficulties. Add that most of the "have nots" have been indulging in credit funded acquisitions lately that may or may not be classified as investments... It could also hurt loan and dividend funded BEE deals.

Set all this against the current political priorities and you see the dilemma. There is a tough decision looming - let things slide to appease the "have nots" in the short term (but probably cause more pain later) or follow a course of tight fiscal discipline with better medium term prospects.

The big warning bells come from the trade deficit. Of course, the USA has been managing quite nicely on a fair sized trade deficit for a long time - but the deficit itself has been comparatively stable. We seem to be seeing a big swing here with evidence it is gaining momentum if anything.

**Dave A** · 28-Mar-07, 01:46 PM

South Africa's Consumer inflation excluding interest on mortgage bonds (CPIX) inflation rate rose by 4.9 percent year-on-year in February from a 5.3 percent rise in January, Statistics South Africa said on Wednesday.

The data, which came in below forecasts, showed that the all-items consumer price index (CPI) increased by an annual rate of 5.7 percent in February compared to January's 6.0 percent.

CPIX fell by 0.1 percent on a monthly basis and headline CPI declined by 0.1 percent.

Economists interviewed by I-Net Bridge were fairly cautious in their reactions, stating that the good data may not have enough impact to keep interest rates in check.
full story from Business Report here