Why you should care about an interest rate hike in the United States

Last year I got a quote to replace the air conditioner for my car and it came to around R9 000.

Robby P.

Today the same unit from the same service centre would cost me close to R16 000.

This is because the air conditioner is imported and the obvious explanation for this massive increase is purely because our currency is rubbish.

It’s not only local factors that affect our currency and our economy; there are global factors that pose a very real threat to our well-being.

An interest rate hike in the US will have far-reaching implications.

Everybody knows that the US Dollar is the reserve currency of the world and global trade is pegged against the currency.

Essentially, the Federal Reserve Bank (Fed), the equivalent of the South African Reserve bank, is in reality the reserve bank of the world. This is purely because of the Dollar’s status as the “world currency”.

After ending “quantitative easing” in 2014, the Fed this year increased interest rates for the first time in a decade.

Another interest rate hike is on the cards for this year and we can see the effects already in financial markets.

So why is an interest rate hike in the US important to you sitting here in good old Benoni?

The Dollar influences everything.

An interest hike in any economy has the effect of strengthening that country’s currency.

In fact, many countries use their interest rates to “manipulate” the strength or weakness of their currency.

However, US Dollar strength comes with global implications and developing countries such as ours become heavily impacted.

What does a strong dollar mean?

Well, quite simply, it makes us poorer!

Dollar strength puts pressure on commodity prices for the simple reason that commodities are priced in Dollars.

When the value of the dollar rises, it will take less dollars to buy commodities, making them cheaper.

In a resource-driven market such as ours our mines rely on buoyant commodity prices to stay profitable.

The other major effect – if you consider our own fragile currency – is a stronger Dollar literally means a weaker Rand.

This could be potentially devastating.

Remember, South Africa services a mountain of debt in Dollars so if we’re paying that debt off in Rands, Dollar strength means that our debt becomes so much more expensive to service.

Local goods become expensive

A weak Rand also means that everything we import becomes more expensive.

It becomes more difficult for business to make money and they have to consistently put prices up to keep up with the rising cost of bringing in goods and services.

Consumer goods become more expensive and you and I start feeling the pinch of a little thing called “inflation”.

Our salaries don’t keep up with the rising cost of living and people start going into debt.

Then our interest rates go up.

One way to combat our currency losing ground against the major currencies is by raising interest rates.

The problem with this is that the local implications become quite serious.

Companies’ debt becomes more expensive, you pay more for your car and your home loan.

Credit card and overdraft debt becomes more expensive and all the while your salary stays the same.

The way to prepare yourself for the imminent squeeze is to get your budget right as soon as possible.

Make every effort now to pay down debt and avoid making unnecessary debt now. It is not the right time in the economic cycle to incur debt.

If you have a bond or are paying off a car it may not be a bad idea to fix your interest now.