January Rates Watch – Our Predictions

UPDATE 29/01/2014: Unfortunately our prediction was wrong! The Reserve Bank increased the repo rate from 5% to 5.5% and Bank lending rates went from 8.5% (a 40 year low) to 9%. We don’t feel too bad though: it surprised nearly everyone! 

The consensus among analysts is that interest rates will be left unchanged at this week’s Reserve Bank Monetary Policy Committee meeting but most agree that a rate increase later this year is inevitable. The Reserve Bank remains stuck in a very difficult position.

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The global financial crisis has forced the Reserve Bank to buy time by keeping the prime lending rate at a record low of 5% for the last 18 months. But it appears that the time it has gained is fast running out: while low interest rates mean that businesses can cheaply buy on credit and take out cheaper loans for expansion projects the increased pool of credit is the primary driver of inflation and indebtedness.

In the final quarter of 2013 inflation dropped back below 6% after it breached the upper end of the target band (3-6%) in both August and September. But the weakening Rand (now at a 5 year low to the US Dollar) and increasing fuel prices suggests that inflation may once again breach 6%.

New research indicates that basic household groceries are 11% more expensive today than they were in March of 2013 while salaries only increased by 6-8% during the same period.

As prices continue to climb many have turned to abundance of cheap credit to make ends meet. Garnishee orders and short term loans abound but the rate of default is enormous: new reports indicate that one in two people with access to credit are in arrears.

Growth was also sluggish in 2013 and isn’t expected to be spectacular in 2014. If the Reserve Bank raises interest rates they may push inflation back down but then those already in debt will be under still more pressure. If they decrease rates further inflation will certainly increase and everyone will feel the pinch.  Damned if you do damned if you don’t!

What it all boils down to is that the Reserve Bank alone cannot solve this conundrum. New legislation that counters predatory lending and educates the public would go a long way to reduce public debt and give the Reserve Bank more leeway. Continued global economic recovery would also increase global demand, finally replacing credit as the primary driver in the local economydownload

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