SARB Hikes Rates: Death Of The Middle Class Accelerates

The South African Reserve Bank’s Monetary Policy Committee just announced that they are hiking interest rates by a further 50 basis points, following a small 25 basis point hike last November.

I am surprised by the SARB’s aggressive action. Even though I thought we might see a 25 basis point hike (in an attempt to defend the currency), I did not expect a 50 basis point hike in such a weak economy.

The higher debt servicing costs that will arise because of this rate hike is yet another burden that adds to the squeeze South Africans will experience in 2016.

Apart from higher debt servicing costs, the other two major financial pressures South Africans will experience this year are inflation on imported items (due to the weakness of the Rand) and rising food prices (due to the droughts we experienced in 2015).

The poor and the middle class will be most affected by these pressures.

It seems like the unfortunate predictions I made 6 months ago are starting to come true.

With the latest rate hike, and the implied hawkish attitude of the SARB, we may even see nominal asset price deflation in 2016, e.g. falling house prices in middle and lower class neighbourhoods.

For those who were appropriately positioned ahead of time: it’s time to sit tight, wait for things to unfold and be on the lookout for investment opportunities that will arise during the downturn.

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  1. Wesley

    Your comments are all focused on quite short term outcomes on an individual level. But have you considered the situation from a national level?

    The increases in lending rate are a form of torture for the economy and the participants. Almost sadomasochistic in the Keynesian sense. A large amount of harm is passed out with the increases which curtail economic activity in general. Why would you want to curtail economic activity in general in your economy?

    However when you consider the consumption biased imbalance in our economy, or in other words the exclusive nature of our economic activity in general.

    It follows that the more harmful elements of our economic activity will be more significantly curtailed. While the more inclusive elements will be less significantly curtailed.

    Re-balancing our economic activity in general would lead to increases in stability and would be positive for the individual if this lead to a protracted period of stable and lower inflation.

    So we could conclude that a net positive outcome is produced by the differential in the response to the change from different elements of the economy. Because we know that certain elements are more stable and more likely to induce second round positive effects.

    However this is the difficulty, in the Keynesian sense. This would be like the perverse dentist who makes the toothache worse to convince the patient that they should floss their teeth more regularly.

  2. Francois Viljoen

    @Wesley:

    My comments on the SARB’s actions (as well as the actions of any other central bank) is more in a sense of amusement, rather than trying to judge its advantages/disadvantages.

    I think Keynesian economics is ‘n pot of crock. I think debt backed currencies are a cleverly nuanced fraud. I think central banks are unnecessary and a very bad idea. I think the thought of a bunch of academics somehow knowing what is best for the national and global economy is laughable. I think that the fact that said academics have the power to manipulate the most important economic metric – the cost of borrowing – is reckless and dangerous, and responsible for most of the economic turmoil we’ve seen over the last century through periods of artificially created deflation and inflation.

    I do however think that the way Keynesian economics and central planning was established in universities as the dominant economic philosophy taught worldwide was brilliantly executed by the interest who benefit from it.

    People even pay money to go and learn it. What a laugh.

    The end result of this experiment will be pain and destruction, whatever the very clever people decide to do.

  3. Carl

    Follow the money. Thinking that these guys are looking out for the little guy is not a foundation to build your thinking on . I remeber paying 25% . I hope we get there soon again, it was hectic. Clear out some dead wood und prune that bonsai has always been the the way.

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