The impact of todays rate hike on consumers

Today’s interest rate hike of 0.5% means that it is now crucial for members of the public to be aware of using high-cost debt instruments like credit cards that have become readily available, particularly over the festive season. With the possibility of future rate hikes early in 2008 a distinct possibility, it is also important to be cogniscant of existing debt and attempt to repay this as it may well become more expensive to service in the near future.

Earlier today the South Africa Reserve Bank (SARB) has announced that the Repo Rate has been increased by 50 bps to 11.0% and the Prime Rate that consumers are exposed to has increased to 14.5%. This represents monetary tightening of 4.0% over the last 18 months.

These rate hikes mean the average consumer is certainly under increasing pressure. Assuming that the average household has a mortgage bond of R1 million it will mean that they now have to pay a monumental R2, 816 more per month than they used to at the beginning of the tightening cycle. If they have an average new car loan of R100, 000 and outstanding credit card debt of R50, 000 this will result in increased monthly payments of R302. For a consumer with debt levels as per the table below, this means repayments of R3118 more than 18 months ago.

Added to this is the higher fuel price that has increased from R6.24/l to the current level of R7.23/l, at coastal regions, over the same period. In light of this the outlook for the South African consumer is rather gloomy.

High oil and food prices continue to hinder policymakers in many countries, including South Africa, who are attempting a fine balancing act between containing inflation and growing their economies.

South African inflation has breached the 3-6% target band for the last 7 consecutive months. The CPIX was recorded at 7.3% for the month of October and we expect it to peak in the second quarter of 2008. The pressures have come from soaring food and fuel costs. Consumers have certainly been feeling the pinch with fuel prices increasing by 43c/l on Wednesday and set to go higher still next month.

The Reserve Bank would have certainly taken note that GDP growth for the third quarter increased to 4.7%, above analyst estimates, from 4.5% the previous quarter. Private sector credit extensions decreased marginally this month but at a much slower pace than anticipated by the market. Oasis clearly sees a number of compelling reasons for the SARB to want to increase rates further at the next Monetary Policy Committee (MPC) sitting in January.

Internationally, the European Central Bank has also made a decision regarding their interest rate today. Expectations were for the bank to keep rates on hold at 4.0% due to a marked slowdown in retail sales growth which has dipped way below expectations along with all indicators of business confidence. The Bank of England has also made a decision regarding interest rates today and expectations were for the bank to also keep rates on hold at 5.75%. Instead they decided to cut rates by 25 bps to 5.5% as they believe inflation is likely to slow as higher credit costs hurt economic growth. On the opposite end of the Atlantic the Federal Reserve in the US has hinted that they will be cutting rates later this month in order to revive their slowing economy even though inflation doesn’t seem to be abating as anticipated.