Merry Christmas, with love from the Reserve Bank

The South African Reserve Bank’s decision to further slash the interest rate by 50 basis points comes as a good time for the economy, according to Liberty Retail SA’s consumer economist Tendani Mantshimuli.

The Monetary Policy Committee has cut rates by a cumulative 650 basis points from December 2008, bringing the repo rate down to 5,5% and the
prime overdraft rate to 9,5%.

”The bank’s decision is good news for the economy and was made against a backdrop of fragile growth prospects, low inflation and high debt levels,” said Mantshimuli. ”The lower interest rates mean that consumers will have more cash in their pockets, stimulating the retail sector in particular and supporting much-needed economic growth. Even better, consumers can work down their debt levels, repair their balance sheets and spend on sound footing.”

Although the Reserve Bank has cut the interest rate with inflation targeting in mind, it is also looking at economic growth. Global growth prospects are uneven, with Asian economies faring well but European economies still seeing clouds on the horizon.

Low inflation, high debt
At an annual rate of 3,2% at the end of September, South Africa has the lowest inflation rate since 2005 and this should remain below
target for the next two years. The Reserve Bank’s forecasts put inflation at 4,3% in 2011 and 4,8% in 2012. According to Mantshimuli, this means the Reserve Bank will be in a good position to keep rates lower for longer.

Consumers desperately need low interest rates to reduce their debt, particularly as household debt, as a percentage of household disposable income, has barely moved from an average of 80,2% in 2009 to 78,2% up to mid-2010.

Of course, what’s good news for consumers won’t be good news for those pensioners reliant on interest income. But South African pensioners
can take some consolation from the fact that inflation is fairly low in South Africa, which is not the case in some advanced economies — pensioners overseas are facing a low interest rate in a rising inflation environment.