Interest rates kept on hold, despite rising inflation

The Reserve Bank’s Monetary Policy Committee (MPC) decided to keep the repo rate unchanged after a two-day meeting on monetary policy. This step caused commercial banks’ lending rates to the public, i.e. prime and variable mortgage interest rates, to remain at a level of14,5%.

Although the CPIX inflation rate is still well above the upper target limit of 6%, the MPC took into account factors such as recent international financial and housing market developments and the possible impact this may have on the rest of the world, including South Africa, as well as local developments with regard to slowing consumer demand and the electricity crisis which are expected to adversely influence the economy and the household sector.

The Managing Executive of Absa Home Loans, Gavin Opperman, said the upward trend in interest rates over the past 18 months had negatively influenced the affordability of housing. The cost of servicing household debt has increased on the back of the rising interest rates and household debt, putting pressure on the already stretched financial position of households as a result of higher fuel and food prices. He also said that “the full effect of the rate hikes in late 2007 has not yet worked through to the economy and the housing market. Household finances are expected to remain under pressure in 2008, despite the fact that interest rates are kept on hold.”

Against this background, Opperman again encourages existing and prospective homeowners to contact their bank to ascertain themselves of the various options available with regard to a mortgage loan. “One of these options is a fixed-rate mortgage contract with Absa. The bank offers very competitive fixed-rate mortgage loans for periods up to 10 years. This option provides peace of mind with regard to the impact of future interest rate movements on mortgage repayments, while it allows for more accurate financial and budgetary planning and facilitates household cash flow management”, he said. Other options include an extension of the term of an existing mortgage loan, taking into account certain conditions; the consolidation of other debt into a mortgage loan, provided that sufficient equity is available in the property; and depositing extra funds such as bonuses in the mortgage account, which will reduce the outstanding loan amount and thus interest payable.

Opperman concludes that “households should make an effort of living within their financial means during these uncertain times by keeping to a budget of income and expenses, differentiating between essentials en luxuries, limiting any further debt, paying cash for purchases, and having specific saving goals”.