News Column

belt-tightening as repo rate is raised

January 31, 2014

Consumers will become more cautious after the SA Reserve Bank (SARB) pushed up its repo rate to 5.5 percent yesterday, First National Bank (FNB) said. It said the new repo rate - at which SARB lends money to commercial banks - would see FNB increasing its prime lending rate to 9 percent. Chief executive Jacques Celliers said the last rate rise was in June 2008 , which had meant almost five years of falling and stable rates. "Many of our peer countries have already hiked rates in expectation of further reductions in the US Federal Reserve QE (quantitative easing) programme," he said. "They have done so to ensure domestic economic and currency stability. We encourage our consumers to set aside additional amounts in their budgets before mortgage and other payments fall due at the end of the month." The rate hike was positive news for investors dependent on interest income, as they had struggled under declining and stable rates in recent years. FNB chief economist Sizwe Nxedlana said the SARB raised the rate to contain rising inflation risks. This was despite fragile economic growth, muted core inflation and inflation expectations remaining reasonably well-behaved. "The risks to inflation facing the SARB stem from the weak rand. Sustained rand weakness could place significant upward pressure on inflation and raise inflation expectations. "By raising rates today (Wednesday), the SARB has chosen to reduce inflation risks pre-emptively in order to protect long-term price stability and household purchasing power." Households should budget wisely in anticipation of further increases. FNB property sector strategist John Loos said the raising of the repo rate would keep market behaviour healthy. "The impact should be seen as 'negative' from a short-term consumer point of view," he said. "As the positive impact of the big interest rate cuts has been gradually wearing off through 2012/13, both real household sector disposable income growth and real consumption expenditure growth have been slowing." The repo rate increase would have a restrictive effect on house price growth. "All bets are off regarding any noticeable rise in house price growth compared to recent levels, and single-digit price growth is expected to remain a characteristic through 2014," he said. - Sapa Cape Argus

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Source: Cape Argus (South Africa)

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