From the Daily Dispatch
October 12 2007
By Roux Van Zyl and Siya Miti
TWO months before Christmas, consumers received another big knock yesterday as the SA Reserve Bank raised the bank interest rate by another half percent to 14 percent.
The hike comes at a time when seven previous rate hikes have significantly lowered consumer spending, especially in the retail and automotive industry.
Even trade union federation Cosatu warned that another rate hike would have a “disastrous impact on the people of South Africa” and lead to lower economic growth and job creation.
But central bank Governor Tito Mboweni said he was determined to bring the consumer price index excluding mortgage costs (CPIX) within the central bank’s three to six percent target range. CPIX has been hovering at 6.5 percent since April.
Mboweni said higher international oil prices had resulted in an increase in the domestic price of petrol and food which continued to “cloud the inflation outlook”.
He pointed at a slowdown in the growth of household expenditure from 7.4 percent in the first quarter of the year to 5.5 in the second quarter and also a “tentative sign of restraint” in credit extension.
“The challenge for the MPC (Monetary Policy Committee) was to assess whether the observed response will be sufficient to bring inflation back to within the target range,” Mboweni said in Pretoria.
“The core underlying inflationary pressures are there,” he said. Even with food and energy excluded, the CPIX measured five percent in July and August.
Cosatu called the inflation-targeting policy “disastrous”.
“(The policy) is based on the false belief that inflation and excessive consumer spending, rather than unemployment and poverty, are the major problems we face.
“Not only have these policies failed to stop food prices rocketing, they have caused other costs to rise and thus actually increased the levels of inflation, while at the same time stifling new investment, slowing down growth and sabotaging government policy to cut unemployment and poverty.”
The hike means that a household paying off a R950000 bond (Absa’s September average mortgage value) over 20 years at prime will see monthly repayments increase by R343.39 to R11813.45.
Since April two years ago, when prime was 10.5 percent, monthly repayments have increased R2329.
The most recent official data showed households are already spending nearly 10 percent of their income on servicing debt, and this will now rise further.
Absa property economist Jacques du Toit said home owners will feel the pinch when paying their bonds, right through to credit card and car loan repayments. Even those without debt will be affected because recent above-inflation wage increases will increase the cost base of the economy, which will eventually filter through to ordinary consumers – a bad sign for Christmas shoppers.
Although Du Toit predicted a slowdown of house price growth, he did not foresee prices falling below the value of home owners’ bonds. But it would impact more on retail than commercial properties because of the high consumer debt levels.
On a positive note, FNB property economist John Loos believes it will be the last interest rate hike and that the property market will turn for the better next year. — Additional reporting by Sapa