Brace yourself: The markets think interest rates could be hiked
- The monetary policy committee is meeting this week to make a decision on interest rates.
- It seems insane, but the risk of a rate hike is rising - despite a collapse in business and consumer confidence
- The SARB may need to be on the defensive.
There is a development close to the office where I work in Johannesburg that is a great indicator of economic activity amongst the well-heeled office workers of Sandton. It is also a useful reflection of the health of corporate entertainment budgets.
In the some fifteen years since it opened as a magnet for excess cash disposal, I do not recall 24Central being as quiet as I have seen it this year. It tells you office workers are cash-strapped and entertainment budgets in the companies they work for are under pressure.
A manager of a once-popular restaurant told me last night he is worried about end-of-year bookings. Traditionally, 24Central has pulsed with festivities from mid-October to early December. This year the bookings are just not coming in. About a year ago, the shutters came down on Allora, a once-buzzing high-end Italian restaurant that the eviction notice on the door read had run too far behind on its rent. That space has remained empty all year. A sign of a deterioration of spending power pre-dating the Nasrec elective conference of the ANC.
Sure, the old Village Walk refurbishment around the corner has brought in some new competition, but it doesn’t explain why patronage of 24Central has dropped to the extent it has.
It’s all about the economy.
We may be slowly emerging from the recession that has gripped the country for the first two quarters of this year, but the impact of higher tax rates, the VAT increase and the impact of the higher cost of living through everything from fuel and household bills has proven to be a severe drain on resources.
Now, the market is warning we might get an interest rate increase this week.
Talk about adding insult to injury.
16 out of 19 economists polled by Bloomberg this week believe rates will stay on hold. Cynically, it is when most economists are in agreement on something I have noticed in many years of watching these announcements, that the opposite occurs.
The risk of an increase has risen dramatically since the last meeting of the Monetary Policy Committee (MPC) two months ago.
Primarily the emerging market risks that have developed in places like Turkey and Argentina are raising the spectre of money draining from smaller economies and that has had a negative impact on currencies, including the rand. A weaker rand is bad for inflation, because so much of what we consume, particularly when it comes to heavy industrial equipment and oil, is priced in dollars.
The fact that South Africa is in recession and that consumption growth is negligible means that raising rates would be a serious negative. But the Reserve Bank might not have a choice. If global interest rates are rising, it makes depositing currencies in those economies more profitable than in countries where rates are low. That leads to further outflows and fuels inflationary pressures.
The last thing SA Reserve Bank governor Lesetja Kganyago wants to do on Thursday is raise rates.
His critics will rightly point to the fact that the economy is under severe strain and taking even more money out of consumers' pockets would appear churlish. His critics are looking for any excuse to force a change in shareholding of the SARB and also to meddle with its mandate.
It’s not a fight he wants to have as he focusses on the real job and that is to protect the value of the currency as best he can in the face of serious pressure.
Bloomberg says the risk of a 25 basis point rate rise has risen from 12% two months ago to 54% now.
It probably means the governor will hold off for now - but it does mean you have to be on high alert for at least one increase before Christmas.
Bruce Whitfield is a multi-platform award winning financial journalist and broadcaster.
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