Johannesburg, 26 Jul 2004
As we all know, global interest rates led by the US (and to a lesser degree the UK) are on their way up. However, after a robust start to the first quarter of the year, recent economic evidence out of the US suggests that any rate hikes would be small in magnitude and at a slow pace, as growth over the last few months appears to have stalled.
In particular, June figures were very disappointing. Does this tapering off of growth mean that any similar rate hikes in SA are some way off?
Alan Greenspan`s testimony indicated that he firmly believed that the recent numbers were an aberration and that the US economy had entered a period of self-sustaining expansion which was ultimately creating some inflationary pressures.
He also went further to say that the expansion, which seemed to be a jobless expansion at first, had developed into a more comprehensive one. "The expansion has become more broad-based and has produced notable gains in employment." Furthermore, he noted that this increase in employment would have a further beneficial spending and growth benefits, thereby becoming self-sustaining.
If we are seeing a self-sustaining expansion then there will have to be extra vigilance with regards to inflation and once again caution was hinted towards inflation last night. While we may have seen somewhat weak numbers out of the US in June, we can still expect rate hikes in the short-term.
What does this mean for the rest of the global economy and in particular for the South African economy? Globally, the Bank of England has been the most "hawkish" or most vigilant with its interest rate policy by cutting these rates by the least of all major economies and raising them earlier than any other monetary authority. In a nutshell it is comprehensively controlling any inflationary dangers. The European Central Bank has yet to increase rates, which is somewhat surprising given the fact that it is the most hawkish of any monetary authority. It has, however, changed its tune somewhat; any talk of rate cuts has been completely abandoned with the bias now being towards rate increases. Other economies such as Canada and Australia have also embarked on `interest-raising cycles` to a greater or lesser degree.
So what about SA? As I wrote previously, and as was subsequently demonstrated in the correction by Statistics SA, the South African economy has been growing reasonably well and indeed further revisions appear to be in the pipeline with these corrected statistics. The property market has been the star performer and with this the resultant wealth effects have further underlined economic growth. However, what is most notable is that while there is a pick up in inflation in most economies, there is no significant increase in SA`s inflation figures or indeed outlook.
At the beginning of the year, many observers were calling for a rate hike in Q3 or Q4 of this year, with the expectation being that the rand would be around 7.50 to the dollar. Given the strength of the rand and the controlled inflation environment, such interest rate increases seem implausible. Indeed a rate hike in Q1 of next year appears to be the more likely outcome.
While the rest of the global economy may have embarked on an interest rate tightening cycle, do not expect SA to follow suit quite so soon. The strengthening rand has served as an implicit monetary tightening tool over the course of the last few quarters and has kept inflation firmly in check. At this point, interest rate hikes are some time away.
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