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The prime lending rate could hit 15.5% by half-year

15 April 2008 Gareth Stokes

When the Reserve Bank’s Monetary Policy Committee met in April this year they were faced with a difficult decision. Should they hike rates in their continued attempt to bring inflation under control – or should they leave them unchanged to prevent the economy from slowing down further. In the end they erred on the side of caution choosing to hike rates another 50 basis points rather than do nothing. On the back of numerous interest rate increases since June 2006 the decision has proved extremely unpopular.

The result of this half-percent hike is that the prime lending rate moves up to 15%. It now seems inevitable that the Reserve Bank will have to take similar action when it next meets on 12 June. We’ll get another chance to assess inflationary pressures in the domestic economy when the CPIX number is released next week. CPIX stood at 9.4% in February and it is hoped the March number will show some sings of slowing. But with domestic price pressures remaining rampant there is probably little hope of this being the case. And that’s before we consider the impact of Eskom’s proposed hike in the electricity tariff.

Eskom’s insane request could be the decider

Eskom remains one of the major headaches for the domestic economy. Apart from the obvious power supply constraints the state electricity company has now told the National Energy Regulator that it needs to pass a 53% price increase this year – just to make ends meet. This increase is in addition to the 14.5% increase already in effect from April 2008. That’s shocking news for the inflation outlook – and interest rates. T-Sec chief economist Mike Schussler told I-Net Bridge: “There is about a 75 percent chance of an interest rate hike in June and about 50-50 for one after that. If the Eskom price hike is contained, then these forecasts might come down.” To make matters worse consumers would face a similar increase in 2009.

Even if Eskom only receives a portion of the requested increase inflation will rise. Along with petrol, electricity is a base component of almost every item produced and consumed in the country. An Eskom price hike will hit consumers in two ways. First it will place additional pressure on disposable household income as families pay more for their own power. And as mentioned earlier it’s going to make it almost impossible for the Reserve Bank to do anything but raise interest rates in April. And that’s bad news for the average two income family which makes interest rate sensitive payments on a house and car.

Food prices continue to soar

Meanwhile there are growing pressures from rising food prices too. The Congress for South African Trade Unions (Cosatu) is mobilising its members to protest against these increases and encourage government to do more to help the poor – perhaps through some form of food subsidy. What’s causing this food price inflation? Those blaming farmers for hiking prices have totally missed the mark. Grain SA chairperson Neels Ferreira says the problem is with higher input prices. He notes: “According to calculations made by Grain SA, the year-on-year increase in the variable input cost component for winter grains amounts to between 60 and 70 percent, and it is expected that production costs for summer grains could increase by as much as 40 percent.”

And these problems are not confined to South Africa. Soaring production costs have pushed food prices higher around the world. Price increases and food shortages have already let to protests (some violent) in Egypt, Cameroon, Ivory Coast, Mauritania, Ethiopia, Madagascar, the Philippines and Indonesia. Many of these countries have already stopped exports of essential food products to try and alleviate supply shortages.

The world is taking action

The global food crisis is echoing through the halls of global organisations such as the World Bank and United Nations. The UN World Food Programme has launched an emergency appeal to raise $500m in food aid. US president George Bush has also stepped to the plate, committing $200m for food assistance to Africa. We can only hope these political bodies realise that no amount of monetary aid will address the problem of physical supply shortages. Rising costs have made it uneconomical for many food producers to plant crops. And the result is valuable agricultural land standing barren and the possibility of food shortages on a global scale.

Editor’s thoughts:
Another rate hike in June will bring us to 15.5% and there are no signs of inflation being brought in check. The last time interest rates got out of hand was in 1998 when the prime lending rate soared to more than 24%. Do you think we could get back to similar levels? Add your comment below, or send them to gareth@fanews.co.za

Comments

Added by Marketer, 15 Apr 2008
I thought we were at 15% already!!!???
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Added by Mark, 15 Apr 2008
With elections in our country on the horizon I would be very suprised to see rates get to far out of hand as this would be political suicide. I am very concerned by the situation across the border though and what would happen to the currencies in the region if a war where to break out. This could send out currencies into a tailspin and that would make things like commodities and energy even more expensive and in turn drive inflation through the wall. So Mr President you see, there is problem in Zimbabwe and it does impact on us. Unless you want to go to elections with inflation scraping 20% you better sort out our brother across the border quickly............................
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Added by PJM, 15 Apr 2008
Prime is indeed already at 15%.
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