Using interest rates to balance the economy is a bit like adding red dye to a glass of water. No matter how carefully you add the dye it is almost impossible to determine how many drops you need to cause the water to change colour. And you will never achi
Extending this analogy to the South African interest rate environment, we notice that Reserve Bank governor, Tito Mboweni has being adding interest rate 'drops' to the domestic economy since the second half of 2006. The result he wants is a gradual slowdown in an overheating economy. The 200 basis point hike between June and December of that year had little impact, so he added another 50 basis points to the bank Repo rate in June 2007.
Could this be the 'drop' that flips our economy on its head? Has this economic countermeasure put the brakes on? FAnews Online looks at two often used indicators of domestic economic strength to find out.
Private vehicle sales under huge pressure
The latest figures released by the National Association of Automobile Manufacturers (Naamsa) point to a continued reduction in motor vehicle sales. The numbers confirm that new vehicles sales for June 2007 were 12.1% lower than the similar period last year.
More troubling is the reduction in the number of passenger vehicle sales. This number is down by around 19% and indicates that a variety of factors are finally impacting on consumer spending. These factors include a significant increase in interest rates, the new National Credit Act and of course vehicle price inflation.
Fanews Online believes it is too early to blame the National Credit Act (NCA) for the decline in new passenger vehicle sales. The Act will initially result in credit applications taking longer to process and approve, but will also create new opportunities for vehicle sellers. You may already have noticed the frightening television advertisements which encourage consumers to finance vehicles over a period of six years (72 months).
The NCA has attracted a fair share of negative press, with some consumer watchdogs concerned that the Act makes it easier for lenders to charge exorbitant administration fees. In the case of vehicle hire purchase contracts, a lender can charge an initiation fee (of more than R1, 000) and as much as R57 per month in administration fees for the life on an agreement.
In our book, the main contributor to the dropping new passenger vehicle sales is affordability, and thus the combined impact of increasing interest rates and rising vehicle prices. That's strike one, Mr Mboweni...
Expect a huge gap before the housing market feels the pain
While Naamsa was breaking the disappointing vehicle sales numbers to the public, ABSA's housing market research revealed that house price growth remained buoyant. In June, nominal growth of 14.9% was recorded in the middle segment of the market. This was slightly down on May, but still reasonable given recent economic developments.
The numbers seem to contradict that any pressure is being felt in the housing market as a result of interest rate hikes. We expect many property market participants will proclaim that all systems remain 'go' for this sector.
The truth is that economic changes to the housing market are a bit like turning an oil tanker. The captain turns the wheel slightly and the tanker takes ages to change course. The small changes to the interest rates will be slow to affect things but have probably just begun to take hold.
The NCA will only bite in six month's time. Speak to any estate agent at the moment and you will verify the doldrums the residential market is in right now. Speak to an agent on the ground, not one of the bosses in the ivory towers.
Editor's thoughts:
South African consumers ignored the 200 basis point increase in interest rates which occurred between June and December 2006. It initially seemed they were ready to ignore the rate hike in June 2007 too. However, the latest credit figures seem to show otherwise. Have you noticed the combined impact of these interest rate hikes starting to bite? Send your comments to gareth@fanews.co.za
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