Reserve Bank governor Tito Mboweni can probably be excused for missing the televised broadcast of the latest Monetary Policy Committee (MPC) meeting decision. After presiding over a series of interest rate hike announcements, Mboweni is probably concerned
He thus wisely left the dirty work to his deputy governor, Dr Xolile Guma, who read the statement which concluded: "Having considered recent developments, the MPC has decided that a further adjustment in the monetary policy stance is required in order to ensure that CPIX inflation returns to within the target range. Accordingly, the Repo rate is adjusted by 50 basis points to 10 per cent per annum with effect from 17 August 2007. The MPC will continue to monitor the relevant economic and financial developments in order to ensure that its mandate is fulfilled."
Of course South Africa's big four banks duly hiked their prime lending rates to accommodate this announcement.
Prime lending rate now at 13.5%
The 50 basis point hike in interest rates announced yesterday brings the total increase in the prime lending since June 2006 to three percent. To appreciate the full impact of these consecutive hikes on consumer spending power, consider that this increase requires an additional payment of R2, 090 per month on a mortgage of R1 million. This demonstrates how much money is stripped from the consumer through a series of interest rate hikes.
And if this reduction in spending power is not enough, consider that the average South African family is already battling rampant food and fuel price inflation. Consumers will now be hard pressed to curtail unnecessary expenditure in order to keep food on the table. On an economic level, this curtailment will result in a decline in retail sales figures, further pressure on new passenger vehicle sales and ultimately a fall in house price growth. But will these pressures result in a reduction in the general inflation levels in the domestic economy? Will inflation come under control and provide the opportunity for future reductions in the interest rate?
While many analysts believe that Thursday's rate hike will be the last in the current upward cycle there are numerous economic developments outside the control of South Africa's regulators that must be considered.
Market turmoil has no impact on decision
Some of these factors were at play while the deputy governor was sharing the latest round of bad news on interest rates. As he spoke, the local equity market was taking another massive beating. International market volatility and the continuing US sub-prime situation resulted in many investors simply dumping top local stocks. Heavyweight shares such as Anglo American (-7.36%), Barloworld (-8.23%) and BHP Billiton (-5.73%) posted one-day losses more often associated with risky penny shares.
At the same time the South African currency was coming under severe pressure. The rand lost steam against the British and American currencies and is currently at the worst levels seen for some time. At the time of posting the article the rand was trading at R7.56 to the dollar and R14.88 to the pound. Only time will tell if we are heading back to the frightening 2001 scenario which saw the rand hit R14 to the dollar and nearly R20 to the pound. The only certainty is that both consumers and investors took a real hammering on Thursday, 16 August 2007.
This stock market and currency volatility illustrates how tricky it is to balance an economy using interest rates. The Reserve Bank is probably correct in raising rates to cool domestic spending. But there is unfortunately little the bank can do about market volatility and the resulting depreciating currency. The combined impact of the rate hike, volatility and depreciating currency might result in the domestic economy losing a bit more steam than was intended...
Editor's thoughts:
South African consumers have battled gallantly against a series of interest rate hikes. Despite regular increases in the cost of credit, local consumers have shored up retail and private vehicle sales and pushed the average house price ever higher. That was until June of this year when the National Credit Act came into effect. Since then, the sale of new private vehicles is on the decline, with house prices showing early signs of following suit. Will the latest interest rate hike announced by the Reserve Bank be the final nail in the coffin of domestic consumption expenditure? Send your comments to gareth@fanews.co.za
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