Will Tito’s scare tactics work?
During the course of last week the media went to town with reports that Reserve Bank governor Tito Mboweni had ‘discussed’ a 200 basis point hike in interest rate hikes. The doom and gloom headlines that followed predicted an interest rate apocalypse from which none would emerge unscathed. At this stage there is no doubt that interest rates are climbing higher; but we seriously doubt a 2% hike is likely on the back of the 4.5% we’ve seen in the last two years. And that means Mboweni (aided by over zealous journalists) is simply out to scare us.
Right now it doesn’t really matter what Mboweni or the press say. The Reserve Bank is sticking to its inflation fighting strategy with interest rates the only ‘weapon’ in their arsenal. With the latest CPIX and PPI numbers stuck firmly in double digit territory the next upward ratchet in interest rates is inevitable. But we’re sure a 1% hike is closer to what we’ll see when the Monetary Policy Committee meets later this month. You now see how the scare tactics work – a week ago we were talking about another half percent hike – but after a 2% threat 1% seems quite reasonable.
Whatever the committee decides we’re going to have to get used to living with double digit inflation. Let’s take a quick look what higher inflation means for short-term insurance premiums, retirement savings and house prices.
Inflation is bad for your insurance
Inflation hits the short-term insurance consumer on two fronts. The first is that the price of household goods and motor vehicle parts increase faster. This inevitably means that short-term insurance premiums have to be hiked to accommodate higher prices. But the second problem is that inflation and a depreciation rand could lead to the replacement values on your policies lagging the cost of replacing the goods by some margin.
This warning was issued by FNB Insurance Brokers, the short-term insurance arm of the FNB financial services group. Chief executive officer Barry Taylor noted that “many categories of goods, especially consumer electronics and engineering equipment, are imported. Adverse exchange rates therefore push up the local price of items such as computer hardware and software and manufacturing plant and equipment. Since the beginning of the year, the depreciation of the rand against the Euro, South Africa’s major trade currency, is 19%.” When you add double digit inflation this price pressure affects the price tag on almost every household appliance.
The best advice for consumers is to call in a reputable short-term insurance broker to give their policy a once over. Consumers should make sure that they compile a complete list of their household inventories and make sure the value insured reflects the current high inflation environment. And once this is done the exercise should be repeated on at least an annual basis.
Good for pensioners?
While the majority of South Africans are struggling to come to terms with the higher interest rate environment, retirees are cheering recent developments. Alan Botha, head of wealth, Gauteng, at Barnard Jacobs Mellet Private Client Services says “over-65s on a fixed income are cheering Mr Mboweni, especially if they can maximise recent improvements in the tax treatment of interest income.”
One benefit to the over-65s is that each spouse can earn an amount of R27 500 tax free – meaning a couple can invest almost R500 000 in a money market instrument and pay no tax on the interest generated from it. But this good cheer might be slightly misguided. Although their interest bearing investments are performing nicely their cost of living will be ramping higher – just like everyone else! And higher inflation soon means that those carefully planned asset allocations attract more tax than intended. That means even pensioners will have to carefully reassess their investments in these inflationary times.
Knocking house prices out of the park
As inflation spirals out of control, house prices have taken a real pounding too. The economists who couldn’t say enough good things about houses as an investment class in the first half of 2007 have since reversed their positions. Latest house price indexes predict a real decline in housing prices in 2008 – the first time since 1999. And there’s worse to come. If we see two more rate hikes in 2008 its quite likely house prices will remain under pressure all the way till 2010.
It looks like consumers will have to bunker down for a year or two and focus on reducing unnecessary expenses to make ends meet. And if that doesn’t work we’re probably going to see a great deal of manoeuvring as families juggle their priorities to make ends meet.
Editor’s thoughts:
With interest rates already at 15% there are many areas of the economy that are suffering. But high interest rates mean you can lock in better returns on cash and money market investments. Have you moved to more conservative investment classes or do you still maintain equities are king? Add your comment below, or send an email to [email protected]
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