MPC urged not to make the "Eskom Error"

MPC urged not make the “Eskom Error”

· Rates need to be cut by at least 50 basis points

· Consumer is hurting enough

· The world’s economic prospects have changed dramatically

The Monetary Policy Committee (MPC) risk making an ‘Eskom type error’ if they don’t cut rates at this week’s meeting according to the head of Virgin Money in South Africa.

John Maxwell, managing director of Virgin Money, the company that brought you the world famous zero annual fees credit card, said today that rather than mulling another rate hike or no change, rates should be cut by at least half a percent (50 basis points).

“It a question of cut or cry for the South African consumer. We’ve all seen what happens when you dither and ignore the screaming warnings for too long – you get an Eskom type disaster that South Africans are only too well aware of.

“Right now the MPC needs to make very sure the South African consumer isn’t further crushed by an unnecessary interest rate rise because they are already hurting enough.

“The MPC needs to show they care about us and our economy. We may well be at a tipping point and hence they should react to minimize the potential damage.

“I fear that if rates aren’t cut this week, the MPC will have to scramble to do so later this year, but like the disastrous Eskom scenario, it will be too little, too late and consumers – and the economy - will once again bear the brunt of sluggish officialdom.”

Maxwell says that ironically, Eskom’s failings have made a rate cut even more necessary because persistent power failures have had the effect of slowing the economy and curtailing consumer spending.

“And there are signs everywhere that consumers are already distressed; car sales have dropped, consumer credit extension has fallen sharply and house sales volumes have also dipped.”

Maxwell also points to the faltering global economies, particularly the US which many see as already in recession, as another warning sign for South Africa.

“The US slashed rates by a further three quarters of a percent (75 basis points) last week and the UK has already cut once. The fragility of the world economy from the sub- prime crisis can’t be ignored any longer. If the major economies of the world start to slow down then of course that’s bad news for us too.”

Maxwell noted that although inflation was a problem in South Africa, hiking rates would not address the root causes which were higher food and oil prices.

“Interest rates are a blunt instrument when it comes to trying to cool food and oil prices. You can hike rates as much as you like but it won’t have an impact. Higher oil and food prices are not a function of South African consumer demand but rather a global phenomenon.

“Other countries have recognised this fact and we should too. Rates need to be cut now.”