This business day article below merely confirms what I have been saying all year with regard to rate hikes. Economists that wants rate hikes should not be taken seriously. They are remarkably dumb and useless. The article: Interest rates ‘a blunt instrument’ in current climate BY EVAN PICKWORTH, 21 JULY 2014, 07:38 RESEARCH by Nedbank Private Wealth pours cold water on fears that inflation may be escaping its 3%-6% anchor. With the inflation outcome over the next decade likely to remain below 6%, according to the research, interest rates are seen as a super blunt tool to use as they could impose unnecessary costs on the economy. An outcome below 6% — the upper limit of the Reserve Bank’s targeted mandate — is lower than expectations in the bond market, and would counter any fears that the central bank has lost credibility in its management of inflation. The last time the central bank raised rates, prior to last week’s 25 basis point increase, was by 50 basis points in January, and that increase failed to prevent inflation from rising to above 6%. The central bank raised the repo rate 0.25 percentage points to 5.75% on Thursday amid fears of inflation breaching the 3%-6% target band for longer than the Bank would like. The central bank expects inflation to average 6.3% this year. Using simulated modelling of probabilities such as rand weakness and rising commodity prices, and assuming the way prices are set does not change, a fixed income analyst at Nedbank Private Wealth, Madalet Sessions, found there was a 50% probability inflation could settle between 4%-5% over the next decade and a 45% probability it would be between 5%-6%. At a yield about 8.2% 10-year bonds in South Africa are pricing in inflation of over 6% over the 10-year period. This is the additional risk investors are being compensated for — inflation-linked bonds, which have no inflation risk, have inflation-linked rates of just over 2%. Meganomics economist Colen Garrow said interest rates were a blunt instrument to use right now as most of the price increases related to commodities such as oil, electricity and food, which were out of the hands of the consumer. The central bank could also not have predicted the strike activity that would take place, he said. The chief investment strategist for Old Mutual Wealth, Dave Mohr, said the central bank appeared to have become worried that the credibility of its inflation guidance was coming under pressure. They are trying to reinforce the credibility of their guidance (of being in a hiking cycle) and may have felt if they did not act now, people would question their commitment to the tightening cycle, he said. Ms Sessions said her research made no claims to the path of inflation, as there would be temporary price spikes and especially as factors like the currency were so volatile. But she felt the interest rate was a super blunt instrument to use. There is no evidence that the price setting behaviour in the economy has changed, despite South African Reserve Bank fears about its credibility, she said. Recent consumer inflation figures indicated that inflation hit 6.6% in May, the highest rate in almost five years. Citadel investment strategist George Herman expects inflation to have peaked at 6.7% in June.
Posted on: Tue, 22 Jul 2014 06:05:40 +0000
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