Analysis: Evidence mounts that rate hikes are slowing economy
November 27, 2007
By Ethel Hazelhurst
Johannesburg - Evidence is mounting that recent interest rate increases are slowing the economy. Some commentators warn that a further hike could be a tipping point.
The Reserve Bank has raised its repo rate by 3.5 percentage points to 10.5 percent since June last year, and economists are debating the merits of a further hike at next week's meeting of the bank's monetary policy committee (MPC).
"The bank should be careful not to go too far," said Andre Roux, the head of fixed income investment at Investec Asset Management. "The economy is slowing, as we start to feel the effects of the first rate hikes.
"The impact of the later hikes has still to come through and another move now could push the economy over the edge. It's often the case in the upward leg of an interest rate cycle that rates are raised once too much."
Stanlib economist Kevin Lings agrees. "A broad range of indicators is showing economic activity is slowing: motor vehicle sales, retail sales, cement sales, building plans passed, volume of housing sales and growth in credit to households."
Strong credit growth has been a major factor in recent rate hikes but it has showed signs of tapering off. Growth in advances to the private sector peaked at nearly 28 percent in February, falling to just over 25 percent in September.
Lings notes that credit to households has slowed even more. Growth peaked at 28.2 percent in February last year and had fallen back to 21.7 percent by June.
However, Annabel Bishop, an economist at Investec, said the MPC's rationale for a further rate hike was that inflation expectations were rising and it was critical to contain them.
By raising rates once more, the bank would signal its determination to keep inflation under control.
Bishop said she had some sympathy with this view, despite the fact that inflation was being driven by food and fuel price increases.
"Despite obvious signs that the earlier rate hikes are working, December would be a meaningful time to raise interest rates given the usual ramp-up in spending over the festive season," she said.
Inflation has been above the 6 percent ceiling of the target range since April, and is widely expected to peak next year at 8 percent or more.
However, the rate hikes are controversial because pressure on inflation is coming from food and fuel price rises due to global supply problems, which are beyond the control of monetary policy. High interest rates force consumers to curtail borrowing and spending.
Vital indicators that will affect the MPC's decision are due for release this week. Statistics SA will release figures on gross domestic product today, on consumer price inflation tomorrow and producer price inflation on Thursday. The Reserve Bank will announce credit extension figures on Thursday and the SA Revenue Service will publish trade data on Friday.
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