Record-low real rate sets stage for aggressive SA hike

The gap is the widest since 1998, when the benchmark repo rate was introduced.

South Africa’s real interest rate is at the lowest level in almost a quarter century, adding to the case for continued aggressive monetary-policy tightening by the central bank on Thursday.

The spread between annual inflation and the nation’s key interest rate widened to 2.65 percentage points in June as consumer-price growth breached the ceiling of the central bank’s target for a second successive month and accelerated to a 13-year high.

The gap is the widest since 1998, when the benchmark repurchase rate was introduced, and further erodes the differential that makes local assets attractive to foreign investors.

Even before Wednesday’s inflation data, traders were fully pricing in a second consecutive half-point rate hike this week.

Forward-rate agreements, used to speculate on borrowing costs, show investors are also pricing in an 80% chance of a 75-basis-point move and 200 basis points in total by year-end. Of 20 economists in a Bloomberg survey, 13 predict the monetary policy committee will raise the key rate by half a point this week, with the rest expecting a bigger increase.

Read: SA Reserve bank to hike repo rate 50 bps on July 21 – Poll

A three-quarter percentage point hike to 5.5% would be the biggest since September 2002, when the South African Reserve Bank lifted the benchmark repurchase rate by 100 basis points.

‘Even faster’

A weak rand that’s likely to fuel imported inflation and expectations of a 75 basis-point rate hike by the US Federal Reserve this month “may raise the pressure on the South African Reserve Bank to tighten even faster,” said Razia Khan, head of research for Africa and the Middle East at Standard Chartered Bank. Her base case is for a half-point increase this week.

The rate of price growth in June was stoked by high food and gasoline costs, even as the government temporarily reduced a fuel levy to contain increases in the retail price of petrol and the wholesale cost of diesel. The measure is likely to have delayed the peak in inflation.

The MPC prefers to anchor inflation expectations close to the 4.5% midpoint of its target range. It has already raised the key rate by a cumulative 125 basis points since November and signaled even higher borrowing costs ahead.

Heightened risks to economic growth — including flood damage in the province that’s the second-biggest contributor to gross domestic product and deeper, more frequent power blackouts — the slowdown in economies of key trading partners and fears of a global recession will also influence decision-making.

© 2022 Bloomberg


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We should keep in mind that real interest rates for our international competitors are even further in negative territory. Their money is “cheaper” than ours. Real rates in the US, for instance, is negative 10%. Money in the US is 3 times cheaper than in South Africa.

Second point. Negative real rates are IMF policy. This is prescription medicine from the IMF to treat the sovereign debt disease. Developed nations are confronted by debilitating levels of debt that are impossible to service. The strategy is simple. If the interest rate on government debt is lower than the inflation rate, the inflation drives up GDP growth relative to the debt levels while the cost of debt is under control.

They use inflation to solve the high Debt/GDP problem because they have lost hope that economic growth will do it. What it all boils down to is this – negative real rates imply that the loss of purchasing power of owners of government bonds, who are investors and pensioners, will in fact be used to pay down government debts. This combination of inflation and negative real rates is a sophisticated and opaque process of expropriation of savings without compensation.

Negative real rates are some sort of “bail-in” of government debt instead of a bail-in of bank debt. Both processes expropriate the assets of depositors to service the debt of the deposit taker. Where a bank bail-in immediately takes the deposit itself, a sovereign bail-in uses the purchasing power of that money in a process of negative real rates that may last for a decade or more.

Third point. – Negative real rates are, by implication, a subsidy to borrowers. The process transfers real value from lenders(bond investors) to borrowers. We can’t beat the highly-indebted governments. So, we should join them.

The national debt is stated in nominal terms. Rising inflation does not influence the nominal debt levels but it does influence the nominal GDP. The nominal GDP grows relative to the nominal debt that stays the same. This is how they “manufacture” a favorable Debt/GDP ratio without any real economic growth.

Central Banking is a miraculous, smoke and mirrors, snake-oil, hocus-pocus wizzardry by people wearing a suit and tie.

Yep – the saner central banks are not reacting to these external inflation impacts with the blunt tool that hiking interest rates is.

The rational use of interest rates is to deflate asset bubbles (already happening in US property) or to cool down an overheating economy that sellers can increase prices into.

We are frigid not overheating in SA! The shelves are filling up with job creation projects that cannot overcome the IRR hurdle that in SA is mostly the risk free rate plus 12%. 20% IRR projects are rare.

We have no asset inflation problem in SA either.

NOBODY can point me to a country with high interest rates and positive job growth

End of comments.



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