Higher interest rate imminent

Higher interest rate imminent


Bokang Moeko

The SA Reserve Bank will likely begin raising the interest rate again, owing to a growing current account deficit, a sharp contraction in growth and weakness of the currency, analysts predict.

Current account deficit widened to 5 percent of GDP in the first quarter from a revised shortfall of 4.6 percent in the final quarter of 2015, Sarb has said. And this was attributed to a slump in exports of platinum and coal as miners cut production after global commodities prices tumbled.

“We expect that this will force the South African Reserve Bank to hike its key interest rate, even in the face of very weak economic growth,” analysts at research house Capital Economics said in a note.

In the past two years, in a bid to keep inflation within its target band of 3 to 6%, Sarb has raised lending rates by 200 basis points (2%) to 7%.

As I write, lending rates in South Africa sit at levels as high as during the 2008/9 financial crisis, and with more hikes in the offing as the worst drought in decades stokes inflation. This could only mean one thing: consumer-led growth recovery now looks unlikely as consumers brace themselves for even more hard times.

People are already crying: “Weak consumer spending… and this comes as a surprise? Increasing food, electricity and fuel costs, stagnating wages… and someone is surprised that we are no longer consuming anywhere near what we were”.

“Inflation fear trumps all if necessary. However, in a slow-growth environment, you hike as slowly as you can and take a room to pause if available. But as the corollary of these two, it means that you can pause but still have eyes set on a high-end point to the cycle,” Nomura’s emerging markets economist, Peter AttardMontalto, said.

Taken against a weak GDP outlook the expectation would be for Sarbs to pause yet again, like in May, at its next MPC meeting next month.

For a slow growth implies lower government revenue, higher fiscal deficits, weak investment spending, sluggish infrastructure roll-out, and rising social and political tensions, all of which are naturally credit-rating negative. You don’t need to be an economist to predict what is to happen in December – a downgrade seems inevitable.

But a growing current account deficit and weakness of the currency makes it improbable to take a pause even in the light of unemployment stats. Recall that Statistics SA’s Quarterly Labour Survey, released on May 10, showed that South Africa shed a total of 355 000 jobs across the formal and informal sectors of the economy in the first quarter of 2016 – soaring to the highest rate since 2008.

It is a known fact that the accelerating inflation should be avoided at all costs. But, while it is imperative to curb inflation, an increase in the repo rate now will hurt the over-indebted consumers most. Who are already, by the way, being squeezed too much.The subsequent results are heartbreaking, for the victims and the economy.

Data from the South African Human Rights Commission (SAHRC) shows that, of 19 million credit active consumers in South Africa, over half have impaired credit records, three months plus in arrears. More than 11 million of South Africa’s credit active consumers were described as over-indebted by SAHRC.

Therefore, any increase, however small, coupled with the increased cost of living would place severe strain on consumers who are already struggling to make ends meet.  The number of credit active consumers struggling to pay their monthly debt will also increase. Andthat will drag down the economy – the economy that is already in crisis. (Lower interest rates increase the level of borrowing and of spending as they make borrowing easier and more manageable to consumers).

The negative news spark much conjecture and concern that South Africa debt would soon be given junk status.

Times are already tough and being told worse is yet to come is depressing. Honestly, I always disliked economics, often economists see the worst in everything. They cannot fantasise about Elysium when the rest is. But now reality has sunk in: Almost everyone is already feeling the pinch – the piggy bank I have been trying to forever fill is empty. In times like these I wish I were a daughter of Jose Eduardo Dos Santos – he has an estimated Net worth of $20 Billion. Or I should just do an easy thing: be a politician like him (check top salaries of African politicians and you will comprehend everything better).

I am not a rich politician, you are not so I suggest you save wherever you can, like by not making unnecessary trips to the shops for random purchases, and add what you save to your savings.

Obama only wears blue or grey suits. Zuckerberg’s uniform is a gray shirt and jeans. Steve Jobs wore blue jeans and a black turtleneck almost every day. Highly successful people simplify their wardrobe. They minimize the amount of decisions they make on trivial matters.

Last month, David Cameron bought a used Nissan Micra costing £1, 495 for his wife to use.

I hope sharing the information will help you simplify your life. After all, your intellect is not judged by affluence. The contributions you make to the world and lives you enhance define you.

So, choose internal route. For the joy and feeling of adequacy you are actively seeking are well placed within you.

The internal route will help you, I hope soon, to realize that paying interest on credit cards and loans (you do not necessarily need) is an expensive business. Saving M1000 every month at an interest of say 5% makes a little difference if you are paying 14% or higher on a credit card balance, a good proportion of the M1000 is going down the financial drain.

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