Is 2% too much, too late?

Reserve Bank boss Tito Mboweni has let slip that a 2% interest rate hike is a real possibility this month, stating that "Drastic situations require drastic measures."

But how many degrees of drastic are there? Surely ‘drastic' was the last 50 basis point hike or even the 50 basis point jump before that? Already 70,000 people a month are registering for debt counselling - isn't that drastic enough?
If Mboweni's threat becomes a reality, we could be sitting on a prime rate of 17% in just over a week's time. To convert that into hard cash, 2% extra on a R1 million mortgage would add more than R1,500 a month to the average home loan repayment.

It's often said that interest rate increases can take six months to a year to be fully felt, so 2% is too much, too late for South Africa - it is likely to push a lot of people over the edge into bankruptcy, rather than further dampening inflationary pressures.

The previous spate of interest rate increases were designed to curb consumer spending, which is supposedly stoking inflation. But wait! Because manufacturers pass-on the cost of higher interest rates by putting up prices, we get hit by a double whammy of bigger shopping bills and more expensive debts.

The logic behind a bumper 2% hike is that the increase is so high that manufacturers won't be able to pass on the additional cost because consumers won't be able to afford the higher prices - particularly because they will be struggling with bigger debt repayments - and manufacturers will have to suffer lower profits instead.

This does not make a lot of sense to anybody outside of the Reserve Bank as even respected economists are warning that such an increase could be devastating. Here's the nightmare scenario:

1. Consumers can't afford their debt repayments, so they lose their homes and cars and are declared bankrupt
2. Manufacturers face reduced profits and higher costs from both interest rates and increases in raw materials and energy, so they start shedding staff
3. Go back to 1. and start all over again

So, what to do if the rate jumps by 2%, or even just another 50 basis points? Don't stick your head in the sand and pray for an oil strike. This is what Justmoney.co.za advises:

• Shop around for cheaper insurance, medical aid, credit cards and even bank accounts - any little saving helps
• Cut your expenses to the bone - use our planner to work out a proper budget
• If you can't make your repayments, don't hide from the reality - speak to your bank and mortgage provider to try and find a solution
• If you really are downing in debt and can't see a way out, contact a debt counsellor for advice

If we can keep spending to a minimum and our borrowing under control, we should be able to weather to storm until the economy settles down. Failing that, hope that Tito is in a good mood next and leaves interest rates where they are.