Comment on interest rates patterns by Andre van der Veer

Interest rates: What should happen? What is likely to happen? How will they be impacted by the influence of the NEC?

Theoretically what should happen, given the fact that monetary policy makers have one significant instrument amongst the few they can choose from, and given current inflation expectations, interest rates should continue to rise from current levels.

This is a contentious argument with the majority of commentators and analysts making a very fair point that there is precious little that SA interest rates can do about the increasing prices of oil and other commodities such as coal and grains. Even if these increases come to a halt, or recess, that would not tie back to any decision made about local interest rates.

The point is not whether SA transport, fuel, food and energy costs in general should be linked to the overall level of interest rates but the real issue is more to do with expectations of consumers around accepting increased prices for goods and services.

This is the background against which interest rates are set. Based on this, interest rate hikes should continue until there is a balance in terms of the expectation around general price levels going forward. Most importantly though is to avoid sacrificing too much economic growth.

Economic growth is exceptionally important in a country with surplus labour. In light of this, there may be some more interest rate increases in the pipeline, but the rate at which they manifest may slow down. The current indicators reveal that the last interest rate hike of 50bp could have been justified at as high as 150bp. However it is wise to first assess the impact of each increase and raise interest rates at a slower pace, with smaller increments over a longer period.

What is important, in terms of the current social and political pressures, is that all these issues will be influenced by making the correct economic decisions. Timing is golden, and this isn’t the best timing ever. However, it is unlikely that the NEC will base their monetary prudence on anything but the facts around inflation.

Interest rates are a blunt instrument and effect a lot fewer people than, for example, the rise of the petrol price. However, the only way to impact inflation expectations is by hiking interest rates.

That said the choice is between raising interest rates lower for longer as opposed to peaking at a higher rate, faster. One must also be mindful on the effects of inflation on the external value of currency – the higher the inflation rate the faster the devaluation of the currency, unless countered by higher interest rates, with implications for the current account deficit and capital formation in the building of power stations and other infrastructure.

If the government is planning to spend billions on infrastructure (with planned power stations and the like) they will be most punitively affected by higher import costs and taxpayers will be lumbered with the increased expense in capital expenditure. Put differently the lesser evil will be to temper inflation expectations with increased interest rates rather than putting a lid on economic growth by ever increasing cost push inflation.

By Andre van der Veer
RMB Proprietary Trading & Investments
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