TV Interview with SABC about Today’s Interest Rate Decision

I spoke to Francis Herd on SABC News’ Business Review last night at 8pm about the upcoming interest rate decision today.

The Reserve Bank’s in a tight spot. If they don’t raise interest rates, the rand weakens further (because the market’s pricing around 3 percentage points worth of hikes in the next year), and fuels inflation of particularly staple foodstuffs that impact low income earners and the unemployed, and we get more labour unrest and higher wage demands.

Either way, the economy is in for some tough times. It’s now up to the Reserve Bank to decide how they’re going to distribute gains and losses between different segments of society in the short-term. In the past three years they’ve implemented policy that favoured middle to high income people who take on secured debt (the wealthy), let’s see if they decide to switch in favour of supporting pensioners, low income earners, and the unemployed for a change by raising short-term interest rates further and purging the accelerating price inflation out of the economy.

It’s anybody’s guess, really. I’m of the view they should surprise economists again by hiking today, but I doubt they’ll do this. So most likely we see an unchanged decision. YouTube of the interview follows the link below.

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South Africa Interest Rate Outlook

Economists and the market now anticipate that the Reserve Bank will hike the repo rate this week, and if not this week, in the next three months. In June 2013 my colleague George Glynos and I outlined ETM Analytics’ interest rate outlook. We wrote that: “Baseline view that repo is hiked 50bp and in the event of a ZAR closer to 11.0000/dlr possibly a second 50bp hike in a short-lived hiking cycle, with rate cuts recommencing perhaps 6-12 months after hikes. In other words, 12-18 months from now repo could easily be 5.00% but with rate hikes and cuts between now and then.” We got quite a bit of flack from the market back in June for putting out this view that rate hikes are on the cards, but it’s nice to see the market has come around to this view now. Download the full report after the link.

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The Retail Boom in SA

I’ve written about the consumer and retail boom in South Africa many times in recent years – most recently in “SA Mining at ‘Breaking Point'”, “South Africa’s Regressing Economy”, and “Impact of Real Interest Rates on Retail and Manufacturing.”

Retail spending is being funded mostly by borrowing from foreigners and locals selling assets to foreigners. We’re selling our capital stock to foreigners and spending the proceeds, not reinvesting it in manufacturing and productive capacity. A low-real interest rate environment means SA is living beyond its means. It’s a highly bearish long-term development for the SA economy.

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