Another interest rate D-Day
When it comes to economic indicators there are two days of the week that consumers really hate. The first of these is the first Wednesday of every month, when adjustments to the petrol price are announced. And the second is the second Thursday of every second month. It’s a mouthful; but that’s the day on which we learn the outcome of the Reserve Bank’s Monetary Policy Committee meeting. That’s when we learn whether interest rates go up, down or remain unchanged.
These days weren’t always feared. In the past we used to get a fairly even spread of increases and decreases. But over the last two years we’ve become so accustomed to bad news on rates and fuel prices that we simply can’t help ourselves. We’ve had to endure 10 rate increases over that period while motorists have seen petrol price increases in nine of the last 12 periods!
Give us a break
Today is D-Day for interest rates. Fortunately it looks like the Reserve Bank will leave rates unchanged at this meeting. According to I-Net Bridge a survey among 13 economists shows that 10 expect rates to remain unchanged, with three indicating a possible 50-basis point hike. A similar poll conducted by Reuters among 26 economists returned 19 in favour of a ‘no change’ statement. Given developments in the local economy in recent months it’s hard to disagree with the consensus. And if we do see another hike today then it will probably be the last in this interest rate cycle. And it’s just as well.
High interest rates and spiralling inflation have wreaked havoc on the domestic economy. We’ve seen sales of new passenger vehicles slump – down 20.9% for the quarter ended June 2008 (compared to the same quarter last year). The latest retail sales numbers confirm a 2.6% decline year-to-year June, following hot on the heels of a 3.4% contraction in May. Retail sales have now fallen for four straight months! Brait economist Colen Garrow says that the latest fall confirms that “consumption has responded to the rate hikes.” You need only take a brief look at Standard Bank’s latest results to get a feel for the financial pressure experienced by local consumers. In the six months to June 2008 the group’s impaired loans are up 122% on the previous comparable period, and 75% higher than the number to December 2007. The group says the total credit loss ratio for personal and business rating has almost doubled, from 1.31% to 2.18%!
Banks are taking a huge hit as cash-strapped consumers struggle to repay loans. The looming bad debts crisis has led to FNB taking the unprecedented step of announcing it will re-evaluate previously issued home loan ‘guarantees’. FNB will withdraw in-principle grants if it feels consumers can no longer afford repayments under current market conditions.
Will inflation play game?
Lady luck is smiling on us at the moment. A big deciding factor at today’s meeting might be the recent fall in the oil price. If oil had remained above $140 per barrel you can be sure an interest rate hike would have been a formality. But as things turn out the oil price has dropped some 30% in the last few weeks – changing hands at a more reasonable $110 per barrel. That is sure to stem some of the global inflationary pressures – and will bring welcome relief to motorists when the September 2008 fuel price adjustment is announced. We’ll probably see a cut of around 100c per litre.
The rand has clawed back some ground against the dollar too. For as long as the oil price and rand/dollar exchange rate play ball we should see an easing of the pressure on local prices... But as we’ve seen in the past either of these measures can swing wildly over a short period of time.
Editor’s thoughts:
As long as oil and the rand/dollar exchange rate play ball we could see a cooling in inflation in the next couple of months. And that could mean a rate cut as early as April next year… Can you survive with the prime lending rate at 15.5% until then? Add your comments below, or send them to [email protected]
Comments