Tsunami of interest rate surges to hit if inflation not dealt with

The global economy could be heading for a new crisis if inflation is not curbed.

It is on the rise and central banks in many western economies have started edging up interest rates to curb the trend.

Economist Dawie Roodt said South Africans should brace themselves for a sustained period of interest rate increases.

Roodt expects the Monetary Policy Committee to up the repo rate by a quarter of a point at its next meeting, with subsequent incremental upward movements of a quarter to a half a percentile each time.

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“The Reserve Bank should already be making some noise about this, not just to prepare people, but to hint to the markets what is about to come,” said Roodt.

“This way, adjustments can be anticipated, calm the market and forward planning possibly ease the shock of any announcement in the near future.”

The UK increased interest rates last month and is reportedly contemplating further increases.

The Organisation for Economic Cooperation and Development said its 38-member states could see a 5.2% aggregate rise in inflation, while last November, the US recorded a 30-year high of 6.2%.

In South Africa inflation is forecast at 4.6% for 2022.

Interest rate increases could spell disaster and lead to a global crash if it is not managed prudently, said Roodt.

“Globally and in South Africa, the level of debt over the past decade is now at an all-time high.”

The rapid rise of property prices in many markets, coupled with an upward trajectory in the cost of debt, could also lead to another property crash on a similar scale to 2008.

The consequence for emerging markets like South Africa could be tough.

“If the US increases interest rates, the dollar will strengthen and indebted countries like South Africa suddenly pay much more in interest. There is a huge risk of a rapid decline in the rand should this play out.”

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America has already started quantitative easing and Roodt expects interest rates to start rising from March.

There are several reasons for rising inflation, said Roodt.

“There are the global supply chain challenges as a direct consequence of Covid. Pent-up demand for goods has created shortages along value chains.

“Also, stimulus packages by governments around the world has fuelled demand further.”

Roodt said Covid relief grants resulted in more disposable cash in the hands of consumers.

According to the United Nations Food and Agricultural Organisation, global food prices have risen by 27% in the 12 months ending November.

A longer-term driver of inflation is the move to cleaner energy. The world is between a rock and a hard place, with fossil-fuel and nuclear power plants not being maintained in anticipation of a move to alternative energy sources, while at the same time, cleaner energy is not widely available.

“The consequence of this is that energy, for now, will continue to become more expensive, adding sustained inflationary pressure.”

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The so-called “great resignation” – people exiting formal employment – has also become fuel for inflation, as has “stagflation”, where slow or zero growth is paired with inflationary pressure has previously been mooted as a status quo.

But the World Economic Forum’s chief economist warned last year that developed economies are at risk of overheating.

This suggests that the global economy is expanding at an unsustainable rate.

“There is a lot of work to be done, and quickly,” said Roodt.

– news@citizen.co.za