South Africa's interest rate annus horribilis: after a year of relentless rate hikes in South Africa, the squeeze is beginning to tell and the poor are getting the worst of it. President Thabo Mbeki and reserve bank governor Tito Mboweni are at daggers drawn. Who is right?

Author:Nevin, Tom
Position:INVESTMENT
 
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South Africans are having to dig deep to survive financially after seven straight interest rate hikes to the prime bank rate, taking it to 14.5% at mid December, and while third quarter GDP growth came in at a surprising 4.7%, most analysts concur that 2007's economic performance will be no better than 4%. This is 2% under the minimum hoped-for 6% needed to make a dent in South Africa's chronic joblessness and poverty. That rate of growth is now out of the window for the rest of the decade, according to a broad range of analysts' assessments.

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The relentless tightening of the rates' screw is the Reserve Bank's virtually exclusive response to driving down consumer spending, perceived as the main reason for inflation hitting 7.3% by year end, well outside its targeted 4%-6% range.

The move has had more negative impact on employment and South Africa's poor than on the narrow strata of the super-rich and is indicative of the growing disparity in South Africa's very rich and miserably poor.

South Africa's higher rates, imposed at a time when most developed countries' are heading downwards, are restricting the emergence of entrepreneurial companies, South Africa's big hope for job creation and economic growth, due to the increased cost of start-up capital.

The tightening has slowed employment opportunity at factories because of reduced demand for their goods, has knocked the current account because the stronger rates-induced rand makes it cheaper to import goods than to produce them locally, and put the brakes on property values taking home loans out of the reach of all but the well-heeled. As a result, bank repossessions of homes and financed goods are reaching new heights.

Rand Merchant Bank (RMB) says business confidence is demonstrating a downward trend to 67 points after climbing out of negative territory in 1999 (the beginning of the end of apartheid rule) to crest at 80 points in June 2007.

RMB attributes falling business confidence to:

Successive interest rate hikes on top of outstanding debt levels plus the tightening of credit standards;

High food and petrol increases that are particularly hurting the lower market segment's real purchasing power;

The strong rand holding back manufacturers' export sales volumes.

The measures taken by Tito Mboweni, governor of the South African Reserve Bank (SARB), have earned the displeasure of President Thabo Mbeki, most of his cabinet colleagues and governing tripartite partners...

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