Rates to remain unchanged while inflation continues to be fuelled by strikes

While there has been talk about interest rates going up sooner rather than later it’s clear that it won’t be during this MPC meeting. So rates will remain unchanged until later in the year.

The reason behind this decision is a difficult one as the MPC has a challenging situation on its hands. “We know inflation is trending high and is expected to breach the upper band of the target (6%) later in the year through early next year. For that reason the MPC should be seriously considering to raise the interest rates,” says Tendani Mantshimuli, Consumer Economist at Liberty Retail SA.“Inflation will be further fuelled by the wage settlements from the current ‘strike season’ which are way above 6 per cent. This is besides other administered prices like the higher electricity and other municipal rates increases. We know that motorists too will pay higher prices particularly in Gauteng with the impending toll fees.”

The balancing act for the MPC is that in trying to keep inflation within target they should be careful not to stifle the fragile economic recovery. We know that the current strike, particularly in the petroleum sector will have a negative impact on growth. “Also, the chances of a robust global recovery grow dimmer each day we hear of still another European economy falling deeper into sovereign debt crisis. The balance of these views is that the MPC should be considering raising rates only later in the year,” continues Mantshimuli.

She goes on to mention that this is an opportune time for indebted consumers to work their debts down while rates are still low. Also, when entering into new debt contracts you should bear in mind that interests rates are going to go up sooner rather than later, it’s important to factor in about 2.5 percentage point of interest payments; that way you can really tell if you can afford the debt. What may seem affordable now may not be a year from today when repayments go up with the interest change. Those consumers who depend on interest income can breathe easier because as rates go up later in the year their income will increase.

“It’s unfortunate that we concentrate on the indebted consumers instead of highlighting the plight of those who save and might be discouraged from doing so because the return is very low at the current low interest environment. It’s important for them and the rest of us to save, it’s just important to get the help of a qualified financial adviser to help you put your saving in a vehicle suited for your purposes and which will yield reasonable returns no matter what the interest rate is,” says Mantshimuli.

When interests go up the cost of borrowing increases, currently as rates remain unchanged at this low level it’s cheaper to borrow, both for corporate and consumers, provided you do it prudently. Not all debt is bad debt, particularly if it’s going to finance investment which increases the economy’s future production capacity.

“The MPC will bear that in mind in the sense that strikes might negatively impact future economic growth, high wage settlement and toll fees will feed into inflation,” concludes Mantshimuli. “South Africa is an inflation targeting economy; interest rates change to make sure that inflation will remain within target. Consumer behaviour will influence inflation in so far as their behaviour in terms of wage demand pushes inflation higher.”