We won't have more money in our pockets -- but we should still use the low-interest-rate environment to reduce debt.
The SA Reserve Bank elected not to cut the interest rate further and it looks as if the first half of 2011 will be all about financial consolidation.
Since June 2008, the Reserve Bank has cut the repo rate by 650 basis points, from 12% to 5,5%, with prime now at 9% from a high of 15,5%.
According to Allister Long, MD of Powerhouse Financial Solutions, the decision to hold back on a further cut is the responsible thing to do, even though consumers would have enjoyed having more money in their pockets.
Stanlib economist Kevin Lings says the Reserve Bank probably feels it has done enough to encourage growth—given that we’re experiencing the lowest interest rates in more than 30 years—and this should support current economic recovery.
“All indications are that people spent more this festive season than in the previous two years, which were characterised by the recession,” said Long. “It could take people until April to recover from their credit spree, and given the increased demand for credit, the Bank had no choice but to hold back on a further rate cut.”
Inflation remains within the Reserve Bank’s target, which is good, but the Bank will likely monitor how internationally driven inflation will affect our own inflation outlook. It has revised its inflation forecast, suggesting it is already seeing some of these pressures feeding through, according to Lings.
Other factors mitigated against a rate cut. These need to be kept an eye on in case inflation starts to climb again. They are:
- The variability of the rand, which trades in a band from R6,60 to the dollar to well outside the R7 barrier.
- The persistently high oil price, driven initially by northern hemisphere demand as a consequence of their extreme winter, and then maintained by Opec, which has stated it sees no need for an oil price below $100 a barrel. This means our petrol will be more costly for the foreseeable future, despite the relative strength of the rand.
- Flood damage in South Africa and Queensland, which has wrecked aspects of our food harvest and commodity output in Australia. Both will have a significant inflationary impact, which will feed through into the second quarter.
The main concern for consumers is how this will affect their pockets. Unfortunately, we can’t expect sunshine and roses—here are some tips to keep you on a sound financial track this year:
- Get your credit card back in line. South Africans, like Americans, like to buy on credit, but this must always be called in.
- Ensure you can continue to pay your bond. One missed payment or two can result in a damaged relationship with your bond provider, and possibly a blacklisting.
- Cash is king. Wherever possible, keep cash on hand to cover essentials, and put that credit card away.
- Live within your means. If you don’t have the cash to pay for something, rather walk away from it. Saying “no” is often at the very heart of fiscal responsibility.
- Consult a responsible, reputable financial advisory company if you find yourself in ongoing difficulty. Do not consult debt counsellors who advertise on street poles—this can only end in tears.
- Budget for the year ahead. Failing to plan is planning to fail.
- Expect the worst, and live as if it will happen. After all, the Bank could have increased the repo rate, as is beginning to happen in some countries, such as Australia. This would have meant more money out of, rather than into, your pocket.
Long points out that we’ve dodged the worst of the recession and millions of South Africans actually have it easier today than they did two years ago. “Financial discipline before and after Easter, and for the rest of the year, will ensure this can only get better. And if there is another rate cut, we will view it as a windfall,” he said.
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