The Running Commentary

Interest Rate Crunch…

Well yesterday saw a further 50 basis point rate increase in terms the rate from the Reserve Bank, necessitating an increase in the prime rate by all of the banks. This increase means that we have had a 450 basis point increase since July of 2006.  I have compiled a graph comparing the interest rate hikes vs. average yearly inflation since since 1998. As you will see the graph gives us a good indication that we have experienced these periods before. 

Interestingly the period November 2001 to November 2002 saw the interest rate climb from 13% to 17% when in November 2001 we saw average annual inflation at 9.3% to the end of November 2001. This climb in the rate was far steeper than we have experienced since July 2006.  I understand that there would have been a very different set of circumstances in play, but what is of interest to me was that we had to reach a 17% level in terms of the interest rate in November 2002 before we saw inflation begin to slow, returning to 6.8% in July of 2003.

We then had a number of interest rate cuts and a period from July 2004 to July 2006 where inflation hovered within the 4.3 to 4.6 band.  The growth in the economy as a result of this period coupled with a global rally meant that we have seen huge growth and therefore inflationary pressures emerging. 

My view, and I know that I am not an economist, is that we will see the interest rates increase one or maybe two more times as the economy feels the pressures of external inflationary drivers such as the ESKOM crisis and the oil price increases. I am guessing that we are go to reach a level of 15.5% to 16% before we see the back of these interest rate hikes.  This is going to add pressure to the average man in the street and we are going to have to ensure that we spend every cent wisely.  As consumers we are going to have to steer away from relying on credit to get us through the month, we are going to have to cut our cloth in terms of what we need as opposed to what we want.  We have all been tempted by the easy access to credit and the fact that we want things that we see, as opposed to buying rather the things that we need. Good luck out there, I am sure that if you can survive the next 12 to 18 months you will do just fine.

InflationInterest RateReserve Bank

Mike • April 11, 2008

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