Rates gone up by 50 basis point

[BobbyMac]

Read here...

SARB ups rates... & credibility
http://www.fin24.co.za/articles/default/display_article.aspx?ArticleId=1518-25_2166075

Most commentators will have differing opinions on this. You're aligned to what Greta is saying, others may be aligned differently.

And the statement you make that most people in debt know how to manage their finances is not true... it cant be, because it is currently a big problem and it wouldn't be a big problem if people knew how to manage their finances....

You are speculating mate. The problem is not debt (Tito has a separate concern over the low savings rates of South Africans - it's not a factor in the recent interest rate). Both Experian and Transunion-ITC data suggests that the total bad debt (defaults on payments, judgements, etc) is under 10% of the total debtors book. Even the default data available to CCA subscribers shows that most consumers service their debt pretty well. Are you struggling to service your debt? Anyone you know have a problem like that? Are you sure this is not just a perception on your part?

Also, many other economists also believe that mortgage debt is not a "bad" debt. It's strange how everyone here seems to share this idea that mortgage debt is bad.

And, now for the record, once again, the key factors pushing up CPI and CPIX currently is not bad debt, but rather: food prices (in fact this is by far the biggest contributor to CPIX and currently suffering the most under inflationary pressure), fuel price inflation and the increased cost of labour. The latter is probably going to have a bigger impact on the data available at the next MPC meeting, thanks mostly due to the various strike action in the past few weeks (and more on the cards)

 

[rendan]

I am not struggling but that doesnt mean others arent...
It is not a perception unless all the media that have covered the topic donno what they are talking about..

Mortgage debt is a bad thing if u have to pay too much..
If u earn 10k net and need to pay 6 or 7k towards ur mortgage, is this not a bad thing?
EDIT: (And please dont tell me abt the tax benefits of mortgage etc... I know all abt that. This is jst a simplified explanation)

And u are right when u talk abt CPI, CPIX, food prices etc.
I knew that and am not disagreeing with you... but tito cant really do anything abt that can he..

 

[noxibox]

Noxibox i understand what youre saying but its been proven that interest rates are the best for curbing inflation (Or rather the easiest) ..

Really, what controlled, repeatable experiments have been carried out to demonstrate this? I read many economic opinions and there are definitely disagreements as to whether inflation targeting is a valid strategy, and if it is what ways are best to achieve it.

And he needs to worry about the economy as a whole

This is exactly what some economists say he is not doing. Obsessing over inflation is most definitely not worrying about the economy as a whole.

We cannot allow inflation to get out of hand. Look at whats happening with the strikes and food prices etc.

How will raising interest rates keep food price inflation in check? Is demand for food being driven by credit? To what extent are wage demands being driven by interest rate increases? Those increases are part of real inflation for people in the street. I would actually expect strikes to become more common and significantly more militant if these interest rate increases continue. How will businesses, including food producers, respond to increased cost of credit? It would make sense to raise prices to compensate.

And i disagree when u say that interest rate increases have had no change.. It is impossible to gauge that. If Tito had left the interest rates as is from 3 years ago, im sure inflation would have increased quite a bit.. Im no economist but if he had done nothing for the last few years, i would guess inflation would have been higher than 10%... I stand to be corrected if what ive said is garbage....

Well you just made that up. He raised rates and apparently expected an immediate effect, but instead inflation went up some more. What happens if inflation is 6+% in a year, will interest rates be up another 3%? And a year after that?

People forget that South Africa's current allegedly frightening inflation rate is still quite low historically. And this country desperately needs more economic growth. It's been good, but I'd say it needs to be a lot better. We have a lot of unemployed people and that is not something we want to continue.

It is impossible to gauge that

You said it.

How do we know increased interest rates did or did not alter the inflation rate.

, not how average people meet bond repayments.. Your house repayment should not cost you more than 1/3 or 1/2 of the joint income for the house...If it does, then you have probably bought a house that is too expensive and are too deep in credit...

Well I just pass most of my mortgage costs onto my tenants, just as I pass the cost of other business credit onto my customers.

On what interest rate should the average person calculate this magic one third to one half income? 10%, 15%, 90% repo rate? Once you have your family squeezed into a small box that costs half a million and they've pushed interest rates to 30%, with inflation, driven by factors not influenced by interest rates, having crept up to levels seen in the 80s what do you do? Maybe drag the entire MPC into the street and string them up.

Let's say this interest rate tactic continues to fail to bring inflation into the fixed range, do they have a maximum interest rate above which they'll not go? Will they admit it didn't work and bring it back down?

 

[rendan]

Okay noxi.. U raise valid points and probably discount many of my statements...

BUT
What is the solution then? in ur opinion anyway...
what should he do to curb inflation?
Yes currently, inflation is driven by food and fuel prices... But people were expecting the rate increase for a while now, before strikes etc.

Excess money supply does add significantly to inflation as well. At least he is doing something to try and curb it, instead of just watching..

 

[rendan]

By the way, Noxi and Bobby, if u guys dont mind me asking, what are your professions?
If u are economists or bankers or something like that, then I will jst stop with these arguments...
At least i am learning something with this

 

[noxibox]

The MPC's decision to hike rates will shore up the Reserve Bank's credibility, writes Greta Steyn.

A statement like that immediately makes me suspicious. Reminds me of a comment made earlier where an economist said they must raise rates to save face. Save face?

I have no idea why people view debt as in general a bad thing. There are perhaps things you shouldn't really be financing through borrowing, but ultimately credit is generally a necessary and good thing. I'd say capitalism depends on it.

Some people might be borrowing excessively, but how many? People do actually think these things through. And you cannot say they should plan for increases? How much is an acceptable leeway? If rates hit 25% and I cannot afford my debt am I a reckless borrower because rates were 10% when I took out my loan? Maybe families should just move to smaller and smaller homes as time goes by? More and more of their limited income incinerated while Mboweni and his crew continue their quest for the leprachaun's pot of gold.

the increased cost of labour

If I was part of a union I'd certainly use my power to keep demanding more money to make up for both increased food and transport costs, as well as the direct cost of credit.

but tito cant really do anything abt that can he..

Instead he'll keep using a tactic regardless of whether it actually works?

I really hope inflation does come down. I don't believe it will be because of the interest rate changes, but regardless if rates hit the levels we saw a few years ago I think this country could be in trouble.

 

[noxibox]

But people were expecting the rate increase for a while now, before strikes etc.

Those huge wage demands could be coincidence, driven by totally separate factors. Without further information it isn't possible to say.

Excess money supply does add significantly to inflation as well. At least he is doing something to try and curb it, instead of just watching..

If interest rate increases don't really work, then they're happening simply to be seen to be doing something, i.e. gain credibility, save face. In other words they're risking damage to the economic growth of the country and damaging the financial situation of ordinary people to look good. That is worse than doing nothing.

What is the solution then? in ur opinion anyway...
what should he do to curb inflation?
Yes currently, inflation is driven by food and fuel prices...

If they want to curb lending it has been suggested that they increase the fractional reserve. I don't know all the factors involved, but it should reduce the banks' available lending capital.

How about giving people an incentive to voluntarily take their money out of circulation? Perhaps taking in capital with a guaranteed minimum return and making that money available purely for business loans, particularly small businesses, new entrepreneurs, businesses that will provide jobs rather than just enriching a select few (we don't want jobless growth).

Why don't people save? Could it be because the bank's give anything from pathetic to dismal interest on savings. How many flexible savings options exist that offer decent interest rates?

What about initiatives to get people into the stock market? I'm not sure what we need here, but typically the barrier to entry is fairly high. You have unit trusts, but they typically require lump sums or a fixed contribution and the returns are not always that great. I know some good brokers, but they won't even get involved if you don't have at least R1 million to put into the market.

They could even go so far as to say that the public has X months to put money into one of the options or they'll step in and take the money through interest rate increases.

What I want to see is some creative thinking, not I have a hammer so everything must be a nail.

Economics is not a science. You cannot carry out repeatable experiments. Most of the research I've read involves looking at historical information and trying to figure out if there is something predictable at work. But this information can be country-specific or economic stage-specific. I see the IMF and World Bank's disastrous policies as an example of the latter.

 

[rendan]

okay i ask again.. R u a economist/banker/etc?
What u say does make sense... but sometimes creative thinking can ruin things..

 

[BobbyMac]

okay i ask again.. R u a economist/banker/etc?
What u say does make sense... but sometimes creative thinking can ruin things..

Creative thinking often works well. Example, this week with the sub prime issues in the States, the US Federal Reserve Bank cut the discount lending rate (a lending rate to banks and financial institutions) in an attempt to stem the market free-fall. What makes this really interesting (and very creative from an economist's perspective anyway) is that although this is largely a symbolic rate (it's not the same as our Repo rate), for the first time US policy makers de-prioritised inflation targeting and instead took action to try and stop the heamoraging of the local stock exchanges - and it worked.