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Share picking becomes an art for... It's belt-tightening time as Stals light... UNIT TRUSTS:CORPORATION HIGH GROWT... How to survive sky-high interest rate... Don't be lulled into believing another M... In the US of A, they salute their entrep... Bank hedges its bets with 100% rand-proo... There's more to setting up a solid enter... You're paying through the nose, so ensur... |
It's belt-tightening time as Stals lights a rocket under the big spenders
Consumers face a period of uncertainty because of the vulnerable rand, writes LEIGH ROBERTS
Batten down the hatches - living in South Africa has become even more expensive than it was last week. And more depressing news in the wake of this week's 1% rise in the Bank rate is that South Africa's monetary authorities may well announce yet another hike in interest rates early in the new year. The major banks followed Reserve Bank Governor Chris Stals's cue on Thursday, announcing that their lending rates would be increased by one percentage point. Borrowers now face a prime overdraft rate of 20,25% and a base bond rate of 20%. Of the four major banking groups, Standard Bank, FNB and Nedcor applied their higher rates with immediate effect, while the banks in the Absa group will implement the higher home loan rate on exisiting bonds from December 1. Not since early 1992 have interest rates been at these high levels. Ten years ago we were paying a prime overdraft rate of 15%. This week's hike keeps South Africa firmly in line for the dubious achievement of having one of the highest real interest rates in the world (the real interest rate is the net rate after inflation is deducted). The reasons for this week's rate hike, as put forward by the Bank, relate to the slump in the international value of the rand and the continued high demand for credit by the private sector. Both of these factors exert upward pressure on the inflation rate, and the Bank attempts to counter this effect by raising interest rates to curb demand. The Bank has long considered inflation as the major obstacle to economic growth. The yo-yoing interest rates borrowers have had to contend with in the past year are largely a result of the Bank's monetary policy of keeping inflation levels down and the financial markets stable. There is some good news on the horizon: Stals has said that if this week's hike has the desired effect of stabilising the rand and curbing credit, an interest rate cut could follow early next year. However, many economists fear that there could be a further 1% hike in early 1997 if the rand continues to fall and credit spending continues to grow. While borrowers will bemoan this week's rate increase, retired people and other investors who rely on the interest income they receive from their bank deposits will welcome the move. An increase in the Bank rate means investors will earn more money on their savings because the banks will pay out higher interest rates on cash deposits and other savings accounts. None of the banks have announced their higher deposit rates yet - there is usually a delay of about a week after any increase in the Bank rate before deposit rates move up. Economists predict that the interest rate cycle will start heading downwards in the middle of next year. At an investment presentation in Johannesburg this week, Syfrets' senior economist Sandra Gordon said she expected the Bank to be in a position to cut the interest rate twice next year. However, Gordon cautioned that the first cut could be delayed to the second quarter of the year at the earliest. The promise of interest rate relief, coupled with a strengthening world economy and an improved performance from exports, suggests that the economy will enter a recovery phase in 1998. Gordon says the economy is undergoing a period of adjustment - a process which, she argues, is necessary to take it into a longer-term phase of strong, sustainable growth. "By adopting the policies stated in its macro-economic plan, the government aims to place the economy on a more stable and sustainable growth path, making growth less dependent on our ability to attract foreign capital and on the prices of commodities, such as gold, which account for the bulk of our exports," she said. These policies should ensure that South Africa moves away from the boom-and-bust economic cycles experienced in the 70s and the 80s which were characterised by surging inflation and fluctuating interest rate cycles. Gordon says the successful implementation of the government's policies will take South Africa into the healthy, durable growth phase envisaged for much of the global community. Top of page
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