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Markets rally on handouts

By Staff Writer

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Markets rally on handouts 

The rest of the world is really feeling the pain.

Here in South Africa we are still tangential to the whole mess. Our stocks have dropped, but not by as much as many other countries.

The west is increasingly relying on stimulating their economies by pumping in money. This is a Keynesian approach as pointed out by the Mail and Guardian. There are a number of ways that this can be done. Printing money is one of them and although this tends to cause inflation (see Zimbabwe) at the moment the international markets are much more worried about deflation.

Here in SA inflation is still high although it is dropping, so there is no need for the Government to go printing a whole bunch of crisp new R200 notes.

The effect of the stimuli being applied internationally is to boost our stocks as we ride up on the backs of the developed world economies. The Times noted that the JSE 'Jumps 7% up on global mkts' they link this directly to the US infrastructure development plan.

The markets are rising, inflation is falling and traders would be 'surprised if [Reserve Bank governor] Tito Mboweni does not cut interest rates this week'. The MPC will announce the change, if any on Thursday afternoon. If there is a cut it will be the first in a long cycle of rises designed to deal with inflation.

The Dispatch also noted that the JSE closed positive yesterday as resources improved. All of these movements indicate that a rate cut may be on the cards.

Business Report carries the comments of a number of economic analysts some of whom appear to be baying for a rate cut, while only one cautioned against cutting too much too quickly.

The article cited a Reuter's poll that put the expected decision of the MPC to cut rates at around 50 basis points or half a percent. In this article some were calling for cuts of up to 4 percent, which would bring us to within one percent of where we were in June 2006.

iAfrica also carried a survey of economists feelings about the interest rate cut, this one carried out by I-Net Bridge. The results are as follows:" Of the 16 economists polled, nine are expecting a 50 basis point reduction, while two are expecting a cut of 100 basis points. Five economists spoken to expect rates to remain unchanged."

Moody's the ratings agency believes that it is an opportune time for the Reserve Bank to begin cutting rates. The effect of all of this is that if the rates come down life will get cheaper and the economy should start ticking over a bit quicker. If you have a mortgage and are feeling the pressure, wait and see what happens on Thursday and then renegotiate your home loan or consolidate your debt into it if you are paying less interest in a prime linked bond.
 

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