XML Feeds

What is RSS?

Categories

Top Rated

    Exchange, Inflation, and Interest Rates

    To sign up to Seed's newsletter (which includes weekly investment reports, fund fact sheets, market overviews, and more) click here and enter your details. For regular updates on investment and economic news visit our Facebook Fan Page by clicking here and 'Liking' our page.

    Last week saw the release of the latest inflation numbers and the Monetary Policy Committee’s (MPC) pronouncement on interest rates. On Wednesday, inflation came out at 5.3% year on year (no change from the 12 months to the end of July). Thursday’s MPC pronouncement was for no change in interest rates, with the repo rate remaining at 5.5% and the prime lending rate at 9%.

    At the same time since the beginning of the month (less than 3 weeks ago) we have seen the rand lose considerable value to developed market currencies. At the end of August, US$1 would have cost just under R7, it now costs over R8 (over 15% depreciation).

    These three indicators are useful in most of our lives. Interest rates dictate our monthly repayments on home, car and other loans if we have any debt, or the rate we receive on any fixed income savings. While the inflation rate can vary widely from individual to individual, the national inflation rate gives us a sense of how fast prices of goods and services are rising. It sometimes appears that the exchange rate doesn’t have a direct impact on us unless we’re involved in the import and export business or are planning an overseas trip, but the chart below shows just interlinked all these indicators actually are.

    In a country with inflation targeting (such is the case in South Africa), changing the repo rate is the main method to guide inflation. Raising the rate increases the interest/debt burden for companies and individuals, and generally results in debt being paid down, the economy slowing, and inflation falling (and vice versa with falling rates). As a lot of inflation is imported (through global pricing for commodities, goods, and services) the level of the rand has a direct impact on the inflation rate and by extension interest rates.

    With the head of the MPC, Gill Marcus, seemingly placing more of a priority on economic growth than her predecessor Tito Mboweni did, it will be interesting to see if and when she changes interest rates should the weaker rand translate into higher inflation. The argument until now for leaving rates at 30 year lows is that the inflation in the economy is cost push inflation as opposed to demand pull inflation (i.e. inflation isn’t as a result of strong economic growth, but rather external factors that can’t be controlled by the repo rate).

    For now there hasn’t been much debate about interest rates as the inflation rate has stayed within the target range of 3% - 6%, but there will no doubt be some interesting debate if/when inflation moves out of this range. If the rand stays above R8/$ (or weaker) for an extended period this debate will most likely happen sooner than expected.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2011-09-28, 15:02:25, by Mike Email , Leave a comment
    Trackback address for this post: http://blog.sharenet.co.za/htsrv/trackback.php/2138

    Comments, Trackbacks:

    No Comments/Trackbacks for this post yet...

    This post has 1 feedback awaiting moderation...

    Leave a comment:

    Your email address will not be displayed on this site.
    Your URL will be displayed.

    Allowed XHTML tags: <p, ul, ol, li, dl, dt, dd, address, blockquote, ins, del, span, bdo, br, em, strong, dfn, code, samp, kdb, var, cite, abbr, acronym, q, sub, sup, tt, i, b, big, small>
    (Line breaks become <br />)
    (Set cookies for name, email and url)
    (Allow users to contact you through a message form (your email will NOT be displayed.))
    This is a captcha-picture. It is used to prevent mass-access by robots.

    Please enter the characters from the image above. (case insensitive)