Rate Hikes Sooner Rather Than Later?

Rate increases loom as inflation quickens

South African consumer inflation accelerated more than expected in May, boosting chances the Reserve Bank might start lifting interest rates before the end of the year rather than early in 2012.

Government bond yields retreated, with the yield on the four-year issue rising to 7.49 percent from 7.445 percent prior to the release of the CPI numbers at 0800 GMT.

May inflation came in at 4.6 percent year-on-year from 4.2 percent in April, Statistics South Africa said, and also quickened to 0.5 percent month-on-month from 0.3 percent, the main drivers being accelerating food and fuel prices.

Saturday Open Thread - The Repo Rate: Going Up?

It's the Saturday Open Thread. This weeks topic: Interest Rates - Stable for 2011 or will we see a bump up in the Repo Rate before the end of the year?

Saturday Open Thread

It's the regular Saturday Morning Opening Thread. This weeks conversation topic: One more interest rate cut? Yes/No?

Tito: Inflation Targeting Is Here To Stay

Tito sticks to his guns

South Africa was better off with using inflation targeting as an instrument of monetary policy, the governor of the SA Reserve Bank (SARB) said on Tuesday.

"Let's stick to it for now," he told a gathering of Wits students.

He said while there were those who argued that alternative instruments could be used to fight inflation, these instruments - such as forcing banks to increase their reserves - weren't useful.

Mboweni said that lately, there had been calls to abandon inflation targeting.

"But that's because rates are high - when rates were low, no one called for inflation targeting to be shelved."

Producer Inflation Worsens To 12.4%

Producer Price Inflation (PPI) has worsened to 12.4%. It was expected to be 11.7%.

Producer price inflation (PPI) rose to 12.4 percent year on year in April, from March’s 11.9 percent rise according to Statistics South Africa.

The PPI rose 2.1% on a monthly basis after March’s monthly increase of 2.0%.

PPI was expected to be at 11.7% year-on-year, a survey by I-Net Bridge has found. Forecasts ranged widely from 11.0% year-on-year to 13.1% year-on-year.

Tito's looking at that big red button again...

TITO GOES NUCLEAR! 2% RATE HIKE IN DISCUSSION!

Tito's hand is hovering over the big red nuke button at the Reserve Bank:

A huge interest rate shock awaits South Africans as the monetary authorities consider hiking rates by another 200 basis points.

Most economists have predicted rates only to increase - at most - by 100 basis points.

But South African Reserve Bank governor Tito Mboweni said on Wednesday that he and his colleagues had discussed the impact on the economy of raising the bank's official repo rate by 200 basis points.

Hiking rates 2% is going to take some cajones!

CPIX Continues To Climb

Consumer price inflation continues to climb. Business Day reports:

THE INCREASE in SA’s consumer price index excluding mortgage rate changes (CPIX) for metro and other areas, which is used by the South African Reserve Bank (SARB) for its inflation target, was up 10,4% year-on-year (y/y) in April from 10,1% y/y in March, Statistics South Africa (Stats SA) said today.
CPIX was up 1,6% month-on-month (m/m) after it increased 1.6% m/m in March. This is the thirteenth month running that CPIX has been above the 6% upper target limit.

Headline consumer prices - the 12-month rate of change in the consumer price index (CPI) for metropolitan areas - was up 11,1% y/y in April from a 10,6% y/y increase in March.

The core inflation rate, which excludes volatile foods, municipal rates and monetary policy changes, was up 10,2% y/y in April from 9,8% y/y in March.

A 50 base point rate hike is guaranteed now and the odds for further hikes after that are rising

Emergency Rate Hike On The Way!

Consumer Price Inflation Index numbers are going to be released next week and the growing concensus seems to be it's going to be pretty bad. Bad enough for an emergency rate hike:

Chief economist of Dynamic Wealth, professor Chris Harmse, says he will not be surprised if an emergency Monetary Policy Committee (MPC) meeting is called on Wednesday afternoon next week after CPIX inflation has been announced at worse-than-expected levels.

April CPI data is due for release at 11:30 on Wednesday and comes hot on the heels of a statement made recently by central bank governor Tito Mboweni that rates should go up again.

Prior to that talk it was inferred from an SABC interview with Mboweni that an emergency meeting may be on the cards as inflation was getting out of control.

The Real Cost Of Credit

The following is a guest post from reader BP

The Real Cost Of Credit

The real cost of credit needs to take into account earnings notably the after tax or disposable income. Interest rates are one thing - the level of indebtness is another! Current levels of debt to disposable income are about 80% - it used to be about 52% until about 3 years ago when it suddenly took off. Such easy credit fueled the property run. Property was never "cheap" in the first place - easy credit pushed it to dizzying heights. At the same time from mid-2003, we had an equity bull market. By all means the residential property market outpaced it - in cape town it did. Where would that be a normal occurence? It is an incredible exception - not to be repeated for a very long time.

As interest rates respond to inflation that is grinding down peoples spending power and hurting the poor, people are crying about high interest rates. Did they never conceive that interest rates could increase from multi-decade lows? Or was it different this time - as told by the knowledgeable estate agents! And inflation will rise further as will prime. bets are on for a definite 50 points next month and a 60% chance of another 50 points in August! Prime at 16%. Not too high?

Consider the following 2 useful indicators:

1) The cost of debt-servicing as a percentage of Income. Current debt to disposable income is 80% and interest rates are 15% (15.55 next month). that means that the real cost of servicing is the product of these 2 or 12% (12.4% next month). Not too high? Consider the crisis of 1998 - debt to disposable income was 52% and prime hit 25.5% making the cost of servicing 13.26%. sure it only stayed there for a short time but it did d damage. We are currently not too far off that now. Prime at 16.5% equates to this punitive figure (16.5% * 80% approximates 25.5% *52%). BUT even so it is not only the level that counts but how high it stays up there! In effect, looking at a graph, it is not the curve that is important but the area under it (the integration of the curve for the mathematically minded). And with inflation set to rise further bet on it staying up there longer.

2) The penalty for borrowing money is actually the real cost of a loan, simply the difference between inflation and the prime rate. Currently it is 4.4% (15% - 10.6%) which by historical standards is really low - the average over the last 15 years is about 7%. so another 1.5% - 2% increase in prime is not impossible to equate to the average.

These two indicators indicate one thing: interest rates will increase in the near term and will rise further before they can be considered as "punitive".

A last comment on inflation. With commodity prices staying high (as per the CRB index of overall commodities), inflation has to feed through. It has already started in food and fuel. Wait for cars, clothing, furniture, and so on. and even though the economy stagnates, if inflation is rising the Reserve Bank HAS to raise rates. In the past, this is what Central banks have done. Such "stagflation" (economic stagnation and inflation rising) portent very hard times. Remember the "sour 70's" where a series of crises and market reversals ruined fixed asset values. They can easily arise again. My view is that they are which is why all my money is in cash products.

Reserve Bank: Inflations Going To Get Worse - Prepare For More Rate Hikes

SARB: Inflation outlook deteriorates

The South African Reserve Bank said on Tuesday inflation was expected to rise, but that it remained committed to bringing the gauge within target range "over a reasonable time horizon".

The targeted CPIX consumer inflation gauge has persisted above the top end of a 3% to 6% range since April 2007, and accelerated to a new five-year high of 10,1% year-on-year in March.

"The inflation outlook has deteriorated since the publication of the previous monetary policy review in November 2007," the central bank said in a twice-yearly monetary policy review.

Inflation Breaks 10%

CPIX at double digits as era of low inflation ends

INFLATION rocketed by more than 10% last month, scaling a new five-year peak that was well above expectations and encouraging speculation the Reserve Bank will raise interest rates at its next policy meeting in June.
The annual rise in CPIX, SA’s main inflation gauge, speeded up to 10,1% from 9,4% in February — its highest since December 2002, data from Statistics SA showed yesterday.

The next rate hike is guaranteed. I suspect the odds for two more after that are greatly increased.

Three More Rate Hikes Before The End Of The Year?

It is possible.

There is a 70% chance of another 50 basis points interest rate adjustment, taking prime to 15.5%, and an even chance of two additional hikes before year-end, according to senior economist from Credit Guarantee Insurance Corporation, Luke Doig.

"Most confidence surveys paint a bleak picture, while expectations don't indicate any imminent recovery," he says.

More Rate Hikes To Come

Rate hikes: Expect more

After what we heard today, I am still expecting another rate hike in June or August, given the way Mboweni was talking how the Bank has reacted to the electricity price increases, and how we can see inflation into double digits.

I won't be surprised to see another hike in June.

Reserve Bank Hikes Repo Rate 50 Points

Mboweni hikes rates as inflation risks remain

The South African Reserve Bank's (Sarb) Monetary Policy Committee (MPC) ended its two-day meeting on Thursday by announcing it would hike the repo rate by 50 basis points, bringing the rate at which it lends to banks to 11.5 percent.

In line with new policy, the repo decision was announced first as opposed to at the end of the statement.

Commercial banks prime overdraft rates will almost certainly rise by 0.5 percent to 15 percent from the current 14.5 percent.

I think we might see further rates hikes this year.

Bond Rates: Which Way Are They Headed?

Here is a graph of the offered bond rates from First National Bank from 1986 to the end of 2007 (source)

So with the US heading into recession, inflation rates locally heading to record levels and the property market hitting a wall which way do you expect rates to go?

Edit: I changed the graph type to a step graph which is more suitable for interest rates.

Expect Another Interest Rate Hike In April

Brace for another rate hike

Nedbank chief economist Dennis Dykes on Tuesday said there is now a "significant" danger of another hike in interest rates in April.

The presentation was conducted in conjunction with the French South African Chamber of Commerce and Industry.

Dykes said two weeks ago he would have forecast a 45 percent risk of a rate hike but current conditions had now worsened to such an extent that the expectation is 55 percent.

Considering that Eskom wants to raise tariffs a minimum of 14% (they're appealing to have it raised 24%!!) and petrol price having gone up R1.40 in the last three months I see the chances of an interest rate hike as as a lot higher.

If the rate is hiked, it would mean that the bond rate would be at 15%. That means that for a R960 000 house (the average house price in South Africa according to ABSA) your monthly payment on a 100% bond would be R12 641 a month. If your bond payments should not exceed a third of your income it means that the average household income in South Africa should exceed R36 000 a month. Somehow I don't think that's true.

Consumer Price Inflation Rises Again

The Consumer Price Inflation Index (CPIX) jumped again this quarter to 8.8% from January last year. The dreams of there being any rate cuts in 2008 are rapidly disappearing.