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Rate cut on the cards?

By Staff Writer

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Rate cut on the cards?

The Monetary Policy Committee (MPC) begins its deliberations this week.

They are talking about setting the basic interest rate that the banks will begin to lend to you at.

The lower the rate basically the cheaper it gets to borrow or pay off the debt that you already hold. All across the world as the credit crunch bites central banks are cutting interest rates in order to stimulate their economies.

We will know what our very own South African Reserve Bank will do this Thursday the 11th of December 2008 at 2pm.

The Times came in on this issue with an article from FNB's chief economist Cees Bruggemans. He reckons that the market is already expecting a 75 basis point cut.

This is three quarters of one percent. It may not sound like much, but when you are dealing with billions it quickly adds up.

The Reserve Bank has been pursuing a policy of inflation targeting trying to bring it down into a targeted band or between 3 and 6 percent. Recently it has been nowhere near there and the Bank has repeatedly raised its rate in order to cool inflation.

Figures released over the last few months however have pointed to inflation slowing and there is a wide expectation that it has turned the corner and that we could well be within the targeted range towards the end of next year.

The thinking then goes that if inflation is coming right we can start to cut interest rates in order to stimulate our economy. The Reserve Bank tends to the conservative and in general will cut rates by 50 basis points or half a percent, but in the face of the global meltdown, they may cut by more in order to speed us up.

However some analysts are still expecting rate cuts to only start in the New Year if not half way through next year.

The Mail and Guardian ran a story also calling for an early rate cut, this was from Nedbank however. They cautioned against waiting too long to institute a rate cut.

A rate cut is not a magic bullet that will instantly make things better, like most things economic it takes time for its effects to be felt. This article also pointed to the trend for international reserve banks to be cutting their interest rates.

The difference is that our economy is in nowhere as bad a state as most of the worlds but we should be wary of following them down the rabbit hole. The Dispatch said that The Guv, Tito Mboweni, hinted strongly that a rate cut was on the cards when he addressed the media at the Reserve Banks year end function when he said that the MPC would be taking cognisance of international banks approach to cutting interest rates in the face of slowing global growth. The Dispatch also carried a story lending further credence to this call to cut rates.

If the rates are cut you will pay less on your home loan if it is linked to prime, but if it not, you should consider consolidating your debt into your home loan to help you hang on until the rates are cut. It also means that you will be able to get personal loans cheaper, which might come in handy after the traditional holiday season blow out. Justmoney provides a budgeting tool, so you can know exactly where you are though.

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