“Prediction is very difficult, especially if it is about the future” (Nils Bohr – Nobel Laureate)
Normally the market and economic commentators react favourably to interest rate decisions of the Monetary Policy Committee (MPC). The Reserve Bank, which houses the MPC, is one of the most admired institutions in the country.
The MPC’s decision to raise interest rates in November however drew a sharp reaction, and polarised opinion into two camps, both with strong arguments –
What can the recent rate increase tell us? Firstly, what those against the increase said…
The economy was either in recession or close to it when the decision was announced. This is contrary to mainstream economic thought as raising interest rates tend to slow down economic growth.
Secondly, inflation at 5.1% is well within the 3-6% band that the MPC targets. If you look at Shoprite, our largest grocery chain, more than 11,500 items in their stores are trading at lower prices than this time last year. Aligned to this is that the fuel price decreased by more than R1.80 per litre in December. The petrol price spreads its tentacles widely throughout the economy and this decrease will reduce cost pressures.
Consumer confidence has been dropping in recent months and a rise in borrowing rates will not help this.
Finally, the currency has shown strong gains over the past few months and thus the Rand needs no bolstering from an increase in interest rates.
Secondly, what those for the increase said…
It helps those with high savings as they will receive more monthly income.
One key uncertainty is the oil price. It has fallen 30% but this can just as quickly reverse.
It was unknown to the general public at the time (although the MPC would probably have known about it) but the Purchase Price Index, which measures cost increases within business, jumped to 6.9%. This indicates that industry is experiencing cost pressures which will over the next few months find their way to the consumer.
The international outlook is volatile with President Trump attacking Chinese trade policies. This volatility often negatively affects developing nations (like ours) as investors tend to move their funds into secure investments such as US Treasury Bonds. Thus, increasing interest rates will help shore up the Rand.
In turn, making the Rand more stable will send a positive signal to Rating Agencies which can help stave off further downgrades. This also can help to encourage investment which is crucial to future economic growth.
If one looks at these two viewpoints, the risks pretty well balance each other out. Clearly, the MPC was cautious with this call and time will tell which side was correct.
So which way will interest rates move in 2019 and beyond?
Where are local and global interest rates going? The consensus has been that the USA will continue to gradually increase rates as its economy has been surging. However, recent comment from the Federal Reserve Board indicates they will pause upping interest rates in 2019. Presently our Monetary Policy Committee have planned to raise rates from 6.5% at present to 7.7% in 2019, but these may be put on hold if the USA keeps rates constant.
Just bear in mind also that it is notoriously difficult for even the best economists to predict future economic conditions with any degree of certainty, so perhaps the best advice is to be prepared for both scenarios.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)