Globally, there is a general upward trend in official interest rates. However, this upward bias is concentrated in emerging markets, with most developed markets opting to keep rates on hold for a considerable time (see chart attached).
The key exception within the developed world is the European Central Bank (ECB). The ECB hiked rates by 25bps on 7 April 2011 and is expected to hike by a further 25bps this week (7 July 2011). This will take their target interest rates (refinance rate) up to 1.50%.
While the thought of higher interest rates in the Euro-area seems completely at odds with some of the extreme difficulties that are currently being experienced in southern Europe (especially within Greece and Portugal), it needs to be recognized that Germany’s economy is doing exceptionally well and will outperform expectations in 2011. In Q1 2011, Germany’s GDP grew by amazing 6.1%q/q (annualised), reflecting a broad-based growth. German confidence levels are extremely high; the unemployment rate is 7%, which is the lowest level since the reunification employment data started in 1992; exports reached a record high recently; and there has been a surge in tax revenue resulting in a lower budget deficit and reduced bond issuance. On the negative side, inflation has been above 2% for five consecutive months (although inflation remains well below 3%).
Among emerging economies, a number of countries have raised interest rates in the past year as part of a process of slowly starting to normalize rates in the face of rising inflation. This includes China, Russia, India, Indonesia and Brazil. However, while we expect further rate hikes in emerging markets before year-end, the pace of tightening is probably slowing due to a combination of still modest economic growth and some moderation in international food and oil prices.
South Africa’s official interest rates are also expected to start to rise. However, given the current moderation in the rate of economic growth (including still modest growth in credit demand and the further slowdown in the PMI), coupled with a slight easing of some inflationary pressure (helped by the lower oil price and still strong Rand), the Reserve Bank can afford to prolong the low interest rate environment for a number of months. We currently expect the first rate hike to take place in Q1 2012.
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