Have we seen an interest rate peak?
With the average homeowner indebted to the tune of almost R1 million the question on everyone’s lips at the moment is: “Will Reserve Bank governor Tito Mboweni be forced to hike interest rates further?” After all, a half percent increase means a dip of R368 in disposable income for each million in borrowings.
The question was addressed in detail by Rian le Roux, Head of the Economic Research Unit for Old Mutual Investment Group (Omigsa) at the company’s quarterly review held in Johannesburg this week. Economists are often accused of sitting on the fence on such matters and the stance on the interest rate debate did not disappoint. Le Roux focussed on issues in the domestic economy in presenting the argument for and against further hikes.
A strong argument for another rate hike
Why do rates have to go up? There are three main arguments that make a compelling case. Le Roux believes that inflation pressures have been (and still are) underestimated. Food and oil continue to wreak havoc on the South African basket of goods used to calculate the Consumer Price Index. And with the per barrel price of Brent crude now certain to break through USD 100 the knock-on effect on domestic fuel prices will be severe.
The second argument is that volatility in domestic prices looks unlikely to settle down any time soon. Finally, Le Roux says that neither inflation nor wage demands have peaked yet. He expects these pressures to trend higher, before peaking some time in the middle of 2008.
These arguments are supported by the majority of analysts. According to the latest polls, more than 50% believe Mboweni has no choice but to raise rates by another 50 basis points in December. And that might not be the last. This news will hit consumers hard, coming in the wake of recent reports that fuel prices could surge by nearly 100c a litre in the next two months.
What about the argument against further hikes?
Le Roux presented a number of arguments to support leaving interest rates unchanged. The most convincing of these is that the domestic economy is already showing signs of a slowdown. This is evidenced by new passenger car sales, credit retail sales and a slight slowdown in credit demand. The fact that economic interventions to impact inflation are not immediately evident should also be considered. It is unlikely that the full impact of the last three rate hikes have filtered through the economy as yet.
Were Mboweni to hike rates again he faces the risk of cooling the economy too much. This would scupper government’s long-term growth plans to halve unemployment and poverty by 2014. So our guess is Mboweni may have to tread carefully to avoid pouring too much water on the inflation fire.
The final argument against rate hike looks to fall flat if recent developments are anything to go by. Le Roux suggests: “inflation impetus from key volatility drivers should begin to ease (oil, food and the rand.)” While global food price inflation might decline slightly we think the high oil price is likely to fuel domestic prices further. South Africa relies too heavily on road transportation for good delivery to escape price pressures from fuel price increases.
A positive big picture
Although it might be difficult to convince consumers that the domestic outlook remains positive, there are a number of structural realities that cannot be ignored. Both public and private sector expenditure on infrastructure remain robust. GDP growth remains above 4% per annum and prospects in the commodities and tourism sectors remain good. South Africa offers plenty of reasons for its citizens to remain upbeat.
To those consumers who are struggling with increasing mortgage repayments, take heart. Interest rates cannot rise forever. We believe we are near the peak of the cycle, and that following a period of consolidation we will see a downward trend in interest rates reappear. Bite the bullet through 2008 – and you will reap the rewards in 2009 and beyond.
Editor’s thoughts:
We are sure there are those among you who are sick and tired of hearing about interest rates. Unfortunately the Monetary Policy Committee meets every two months and the domestic economy has meant that three of this year’s meetings resulted in hikes that have hit consumer’s pockets hard. The argument is that grudge purchases are hardest hit as disposable income falls – and that consumers will drop ‘non essential’ items from their budgets as hardship increases. Have you noticed an increase in policy lapses on the back of recent rate hikes? Make your comment below, or send an email to [email protected] Finally, readers called for the NFP Exclusion Grid following yesterdays newsletter – it can be downloaded here.
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