Rate hike may slow economic growth

By Staff Writer


From Business Report
October 12 2007
By Ethel Hazelhurst

Johannesburg - Householders who, from today, will pay 14 percent interest on their benchmark mortgage bonds and overdrafts, are likely to cut back "noticeably" on their spending, according to Goolam Ballim, chief economist at Standard Bank.

The rise in prime and mortgage lending rates comes after Reserve Bank governor Tito Mboweni and his monetary policy committee (MPC) made the controversial decision yesterday to hike the bank's official repo rate by another 50 basis points to 10.5 percent.

Businesses that borrow in the wholesale market and can negotiate on a range of rates will face similar increases.

Ballim warned that the "psychological impact" of new hikes at this point in the interest rate cycle would be "proportionately greater in tempering the will to spend" than the initial hikes last year, "when the economic environment was still benign". The implication is that the latest hike might be one too many, and that economic growth could slow further from 4.5 percent in the second quarter.

The MPC decision came after important indicators showed that the first round of rate increases, from a low of 7 percent in June last year, is already slowing spending.

Data from Statistics SA show that retail spending fell 1 percent in real terms in July, after a fall of 4.1 percent in June.

The National Association of Automobile Manufacturers of SA reported recently that overall vehicle sales contracted 13.6 percent month on month in September.

Cement sales growth, an important indicator of construction activity, has been falling sharply since January and industry analysts are warning of liquidations and job losses in the industry.

"Domestic cement sales have fallen from a peak of 1 364 tons in January to 1 179 tons in September - a fall of nearly 14 percent," said Johann Els, an economist at Old Mutual Investment Group (Omigsa).

Cement sales growth in the period slowed from 22 percent in January to 7 percent in August, then to 2 percent last month. Feroz Basa, equity analyst at Omigsa, said cement sales were driven by the residential sector, which was showing definite signs of slowing. "Of the 1.2 million tons sold a month, about 60 percent to 70 percent goes into the residential market."

Ballim was concerned about the impact of the repo rate hike on lower-income earners and new entrants to the debt market.

"It is becoming increasingly apparent that lower-income consumers, who have little if any savings, and novice borrowers are under dire stress," said Ballim

"The investment cycle is flattering the overall figures, masking the softening in consumer spending."

Against this backdrop, business confidence is faltering.

The Investec/Bureau for Economic Research purchasing manager's confidence index declined in the second and third quarters, after reaching a high in the first quarter of this year.

However, there is a strong case to be made for the rate rise.

The benchmark CPIX (consumer price index excluding mortgage costs) has breached the ceiling of its 3 percent to 6 percent target range every month since April.

It rose 6.3 percent in August, down from 6.5 percent in July, but is likely to rise again. Mboweni said it was expected to peak at an average of 6.8 percent in the first quarter of next year.

He said oil and food prices "continue to cloud the inflation outlook". The price of North Sea Brent crude oil, which was trading at $72 (R485) a barrel rose to more than $80 a barrel last month and is now trading at about $78. Though food prices show signs of moderating, they are still at "elevated levels".

Clearly the MPC felt the hike was needed to maintain the bank's credibility as an inflation fighter.

Recent Articles

Featured Tax implications for capital gains

Capital gains do give rise to tax implications. We approached an expert to find out what these are.

Preparing your domestic staff for leaving your employ

We found out what measures you should take in order to ensure your domestic worker is financially secure after they leave your employ.

Can you monetise your hobby?

As with most hobby enthusiasts, you likely have spent many hours developing unique skills to perfect your passion. However, have you considered getting paid for this effort as well?

What are the interest rates on store accounts?

Opening a store account is one of the easiest ways to build your credit score. Not surprisingly, a recent report by the National Credit Regulator (NCR) found store accounts to be among the most popular credit types for South African consumers - and demand for them is growing

Deals

Thursday Prawn Special at Blowfish Restaurant

Price: R125
When: Thursdays
Where: Cape Town

Tonsorial Gents Cut and Style Deal

Price: R300
When: Tuesdays to Saturdays
Where: Cape Town

Pedicure Spring Special at Shambala Spa

Price: R390
When: Mondays to Fridays
Where: Gqeberha


Latest Guide

Guide to debt rehabilitation solutions