Guiding consumers since 2009

Is 2% too much, too late?

By Staff Writer

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.

Recent Articles

Featured What are the three phases of money laundering?

Money laundering seems like the kind of thing that’s only a concern in blockbuster films. However, South Africa is, in fact, considered a hotspot for money laundering. So, what does this actually entail, and what are the consequences of this illicit practice?

Asset repossession: What banks want you to know

When you’re facing financial strain, it can be difficult to keep up with your debt. Unfortunately, if you refrain from paying your debt, your creditors have the right to take legal action against you. This includes repossessing your assets. But before you hand them over, here’s what you should know.

How to spend a lumpsum for great returns

Imagine you win the lotto. Anyone in this position would be ecstatic! But once your excitement settles down, you’ll have to consider what’s the best thing to do with this money.

How to identify an investment scam

Many people invest a lot of money for their future and that of their offspring. Unfortunately, some of them never reap the benefits because the investments were scams. Luckily, there are ways you can find out if an investment opportunity is too good to be true.

Deals

Get 50% off your friend’s treatment at Mangwanani Spa

Price: from R250
When: Until 30 August
Where: KZN and JHB

Telkom LTE lockdown Deal

Price: R369 per month
When: Until 31 August 2020
Where: Nationwide

Save up to 20% on your car insurance with MiWay

Price: Available on request
When: Daily
Where: Nationwide


Latest Guide

Guide to debt rehabilitation solutions