The latest hike in interest rates will put further pressure on already squeezed consumers, reports Max Gebhardt
THE banks followed Reserve Bank Governor Chris Stals’s lead this week with a 1% rise in interest rates, hitting consumers exactly where it hurts most – in their pockets.
The commercial banks’ decision to raise the prime overdraft rate to 20,25% – its fifth change this year – will deal a blow to Christmas sales as consumers buckle under an increasing debt burden.
Analysts say Stals’s hand had been forced by the latest rise in the consumer price index (CPI) and heavy capital outflows, but the decision had become a matter of when – not if.
Economists believe the hike is likely to lead to a further slowdown in private consumption expenditure and deal a death blow to companies’ investment plans, making many predictions of a 2,5% rise in gross domestic product (GDP) next year overly optimistic.
The increase in prime rates could also impact on the already depressed housing market. The mortgage bond increase will mean monthly bond repayments on an average house of R100 000 will increase by about R70.
Figures released by the Central Statistical Service (CSS) this week, showed South Africa’s official inflation rate had risen by 0,7% last month to 9,1%, roughly in line with analysts’ predictions.
The CSS said a sharp jump in food prices was largely to blame for the increase.
Bank credit extension and the money supply had also continued to increase at unacceptably high levels in the last few months. Adding to the Reserve Bank’s woes is the sharp depreciation in the rand, forcing Stals to adopt a more conservative monetary policy.
Economist Luke Doig, of Credit Guarantee, said many medium-sized businesses in the formal sector are likely to take a heavy pounding because of the hike, especially as they have been taking on high levels of distress borrowing in recent months.
But many economists question whether a one- percentage-point rise will be enough to offer the beleaguered rand and the critical shortage of foreign reserves some measure of protection. Many feel an interest-rate hike has long been discounted by the market.
The hike will cast gloom over retailers’ preparations for the Christmas holiday season, which the South African Chamber of Business (Sacob) had been predicting would be a bumper year. Sales of R30-billion had been forecast over November/December.
Although underlying fundamentals in the economy have been pointing towards a cooling-off period, indications are that the man in the street had already started to feel the pinch.
A representative for First National Bank (FNB) Card Division said he was seeing an increasing number of people having difficulties in servicing the debt levels on their credit cards.
“In the traditional card market we have seen an adverse swing in the percentage of customers who have got themselves in arrears,” he said.
There had been an 8% year-on-year increase in the number of people falling behind on their repayments, but he cautioned that these figures could be skewed because of a new approach in handling FNB’s credit card division.
Chris Liddle, executive director of Southern Life, said the insurance industry, which economists say is traditionally the first to be hit as economic growth starts slowing, had seen a 3% year-on-year increase in the lapse rate on the payment of policy premiums. According to Liddle, the industry has been experiencing a steady rise in the number of policies surrendered since 1994/95.
“This is an alarming sign,” he said.
This latest round of bad news is likely to place further strain on the government’s macro-economic strategy, but Stals believes that if all the proposals in the Growth, Employment and Redistribution document are implemented, real interest rates will decline by themselves.