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Higher interest rates predicted soon(ish)

The global financial crisis was not yet over, warned Reserve Bank governor Gill Marcus last week when she announced that the repo rate would remain unchanged for the next two months. This warning followed the collective sigh of surprised relief of those present.

The repo rate — the rate at which the Reserve Bank lends money to commercial banks in the event of a shortfall of depositors’ funds — is the main tool with which inflation can be managed. The repo rate influences all other interest rates.

The last repo rate increase was in January 2014, when it was hiked by 50 basis points to 5,5% after hitting a 40-year low last year at 5%. But the lingering at record lows seems to be at an end, based on Marcus’s comments.

That South Africa is heading for further hikes in interest rates seems to be a given, but by how much and how soon they will rise are not yet certain. The repo rate has come down from a June 2008 high of 12.5% (when the prime rate hit 15.5%) but some economists predict that we are heading towards this high rate again in the foreseeable future.

Marcus said that the factors contributing to the coming hikes included the sharply depreciating currency, capital outflows, slowing economic growth and rising inflation. She mentioned in her announcement that the Reserve Bank had revised its figure for economic growth in the 2014 calendar year down to 2.6% (from 2.8%).

Professor Martin Breitenbach of the School of Economics at the University of Pretoria said that at current levels, the effect of interest rates is still negligible and consumers could ride out the hike by rearranging their spending patterns. But much higher rates would mean the cost of debt could lead to financial difficulties for consumers over the long term.

Standard Bank’s economists agree, but Sugendhree Reddy, head of personal banking, said: “We tend to ignore individual increases in our cost of living, because a R20 increase on a tank of petrol is not going to break the bank. However, the cumulative effect of these increases is significant.” 

Research by Standard Bank shows that a monthly instalment on a R500 000 vehicle financed over 60 months would climb from R 10 379 at a prime rate of 9% to R10 624 at 10%. If South Africa reached a prime rate of 13%, the monthly repayment would be R11 377, an increase of R630 per month, or R37 800 over the five-year life of the asset.

Dawie Roodt, chief economist of the Efficient Group, said that a 13% prime rate is not that far in the future, but he does not foresee it happening before the end of 2015.

“The impact of interest rates for the average South African always addresses two audiences: those with a high level of debt and those who earn their income from interest-bearing investments, mostly pensioners. Of course they are on opposite sides and when the one side benefits from higher rates, the other side suffers.

“In the short term, the net effect of higher interest rates will be zero since these two groups’ economic vulnerability cancel each other out. In the longer term, however, higher interest rates will negatively impact the economy as a whole with a knock-on effect reaching into all the sectors.” 

This supplement has been made possible by the Mail & Guardian’s advertisers. Contents was sourced independently by the M&G supplements editorial team 

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