Interest rate cycle may have topped
With all the financial scandal surrounding Fidentia and its associated companies, you can be excused for having missed the most recent announcement on interest rates. Reserve Bank governor, Tito Mboweni, left interest rates unchanged at the Monetary Policy Committee (MPC) meeting held on 15 February 2007.
His decision brought some relief to heavily indebted South African consumers, who feared a continuation of the rising interest rate trend that emerged in the latter half of 2006. Another 50 basis points in addition to the 200 points already raised, could have been too much to bear for many cash strapped families.
While he remained concerned about rising household expenditure and the resulting inflationary pressures, Mboweni was prepared to attribute a great deal of this expenditure to prevailing economic factors. These included the stellar performance of the JSE in 2006 and the continued improvement in house prices. Strong growth in property and equity investment leads to improved household balance sheets which in turn encourages spending.
Can strong housing and vehicle sales continue?
Credit drives the market for new house and motor vehicle sales. The stable interest rate environment has resulted in a huge growth in private sector credit extension as consumers rush to purchase properties and motor vehicles. Why has the 2% increase in rates not put a halt to this buying frenzy?
A quick look at new vehicles sales suggests that these recent hikes have had little effect. Consider thought that each 1% increase in the lending rate equates to a R70 per month increase on a R100, 000 mortgage loan. The impact on the average family is a lot more serious due to the higher average house price, said to be nearing R750, 000 in 2006. Consumers are bound to feel the pinch sooner or later.
The economy usually reacts to monetary policy changes a number of months after they are implemented. For this reason, the real impact of the interest rate hikes weve recently experienced will only be known 6 months to a year from now.
The housing market is already contracting, especially at the high end of the market. In the next few months we might see new vehicle sales take a breather too.
Will economic growth stop further rate cuts?
Increases in interest rates are supposed to slow down inflation and put the brakes on an overheated economy. If the latest GDP figures are anything to go by, South Africa is still growing strongly despite the central banks best efforts. The country recorded growth of 5.6% in the last quarter of 2006.
Despite this, the Reserve bank believes that inflation is under control. They expect CPIX to hit a high of 5.6% in the second quarter of this year, before settling below 5% in 2008. The average level for 2008 is predicted at 4.7%. Another positive factor is that major Western economies (and the US in particular) are not expected to raise interest rates in the coming months.
Given this data, the outlook for interest rates is positive on both the domestic and international scene. It would appear South Africa is at the top of its current interest rate cycle- and we may even see a cut in interest rates before the end of the year.
Editor's thoughts:
Changes in interest rates have a huge impact on the disposable cash available to consumers. Rate hikes have an impact on the sale of houses and other big-ticket items too. Do you think the Reserve Bank is doing a good job on keeping inflation in check? Send your comments to [email protected].
