News Column

Interest rate hike will pinch

January 30, 2014

South Africans already biting the economic bullet should brace themselves for even tougher times. This is especially the case for those with a bond on their home, or who are paying off a car, personal loan or credit card. The interest rate was increased for the first time in almost six years yesterday. Reserve Bank governor Gill Marcus surprised the country and caught most economists off guard by announcing that the repo rate would increase by 0.5 percent to 5.5 percent. This would see the prime lending rate by commercial banks increase to 9 percent. Only those with savings could smile a little. The move comes after the rand depreciated significantly over the past week to a five-year low against the US dollar, raising concerns about high inflation and further fuel price hikes. Most economists and analysts were expecting a rate hike later in the year. The country's largest debt counsellor, DebtBusters, said it expected "a massive spike in home loan defaults" from consumers burdened with debt. Chief executive Ian Wason said those with home loans would be the most affected. "Not only are these consumers already faced with price hikes for electricity, rates and petrol, but many are overloaded with unsecured debt as well. This may be the final straw for many, and I would expect to see a large spike in defaults on the banks' home loan books in months ahead." Almost one in two credit-active consumers had impaired credit records, meaning they had missed three or more monthly payments or had an adverse listing, judgment or administration order. "I completely understand Marcus's rationale for increasing rates, but it is terrible news for the over-indebted consumer," he said. Durban estate agency boss Myles Wakefield said there was little room for growth in the economy and that the hike would hurt. "The rise in the repo rate was a surprise move, but one which shows the credibility of the SA Reserve Bank for sticking to its mandate to target inflation, even if that means raising the interest rate," he said. "On a R500 000 bond over 20 years the new interest rate will mean homeowners will have to pay an additional R159 a month. Home-owners with a R1 million bond over a 20-year period will need to pay an additional R319 a month." Standard Bank's head of personal banking, Sugendhree Reddy, advised consumers to begin reducing short-term debt, add extra to their savings accounts and, if possible, add more to their home loan accounts. "It is not all doom and gloom. Consumers can also take advantage of savings rates which are likely to increase as a consequence of the repo rate hike," she said. Paul Stewart , an executive at Durban -based Grindrod Asset Management, said it appeared the decisions by several emerging market central banks, such as Turkey , to aggressively hike their short-term rates to protect plunging currency exchange rates, forced the hand of the Reserve Bank to some extent. "I suspect the Reserve Bank is worried about the inflationary effect of the weakening rand and took the step toward signalling to the market that higher rates are on the way." Mark Stewart , the chief executive of auditing firm BDO, said with the high level of borrowings many South Africans were exposed to, a modest increase in the interest rate might have a significant effect on disposable income for basic purchases. "This, combined with the effects of inevitable increased transport and food costs, will put further pressure on households. While this increase is likely to have a negative effect for most consumers, it is a positive move by the Reserve Bank to try and stem the slide in our currency, and may be in the best interests of our economy despite the hardship it may cause." Durban Chamber of Commerce and Industry chief executive Andrew Layman said: "It's not good news for consumers, but pensioners who depend on interest income will be happy. The rand is under huge pressure and it is for this reason the Reserve Bank has taken what is probably appropriate action." Pietermaritzburg Chamber of Business chief executive Melanie Veness understood the move, but her concern was that the hike could curb consumer spending, which could slow the economy further. "We have already seen some appliance retail stores close down or downsize in Pietermaritzburg as a result of the slowdown in consumer spending," she said. Cosatu spokesman Patrick Craven said: "It is a knee-jerk reaction to the fall in the exchange rate of the rand against other currencies and the imagined threat of rising inflation." The Mercury


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Source: Mercury, The (South Africa)


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