The great cash juggling act begins as rates rocket
New interest rate hikes began slamming in on Friday and economists predict they will stay for a while, writes LUCIENNE FILD
On Friday commercial banks were left reeling when the repo rate shot up to 20.4% from 17%. Standard Bank followed suit on Friday night by raising its prime rate from 20.25% to 21.25%. Standard is yet to move on its bond rate. This was after the Reserve Bank allowed the rate to float in response to the rand's diving to R5.52 to the dollar in the morning.
The bad news is that if the repo rate remains at this level, the highest rate in 13 years, other commercial banks are also likely to increase all lending rates within the next two weeks.
The big commercial banks increased their prime lending rates from 18.25% to 20.25% over the past two weeks, and home loan rates, interest on overdrafts and car financing rates have also been pushed up by 2%.
The only consumers left smiling are pensioners and others who receive interest income from fixed-deposit investments.
Nico Czypionka, Standard Bank group economist, predicts interest rates will remain at their current high level for at least the next two months. And there could be a further increase, he says.
Czypionka says the rand's fall to R5.52 on Friday signalled a loss of trust by foreign investors in SA and showed that the hike in interest rates had done little to stabilise the market.
"This is a crisis. It is not a gentle thing anymore," he says.
So where does this leave you, the consumer?
Quoting statistics released by the Reserve Bank, Czypionka says 70% of the average SA consumer's annual income is indebted, while 13% to 14% of disposable income is spent on servicing debt.
Most families have a mortgage bond and car finance to repay. If their mortgage bond and car repayments increase substantially, they will be left cash-strapped.
Czypionka warns consumers to be cautious in handling their finances. "Don't borrow yourself out of a temporary decline of lifestyle. If you are squeezed for cash, cut back - it won't be forever. There is no soft option. You'll end up with a greater burden."
Czypionka says an easing in interest rates will depend on what happens between now and October. "The government must get the situation in hand. They must stop looking over their shoulders and come up with confidence-boosting steps."
Michiel Bester of independent economic consultancy Econometrix says consumers should have taken advantage of the breather granted them by the two drops in interest rates since October last year - by using the extra cash to lower their debts.
And especially now, with further hikes in interest rates looming, consumers should reduce their debt as a priority, he says.
Bester expects the prime lending rate to remain at high levels for about three months. "There is also a 60% chance that prime lending rates will go up again in the next two weeks."
But at the same time the probability that interest rates will come down within the next six months is high, says Bester.
The extreme weakness in the rand - from R5.28 to R5.52 in one week - is perplexing.
"We're a small country, but we are not exactly a Mickey Mouse country or banana republic," says Bester.
Property economist Neville Berkowitz says higher interest rates will have a negative effect on the affordability of residential property over the short term.
He does not, however, expect mortgage rates to remain at the current 20% for longer than two to three months.
"It's a matter of weeks rather than months before interest rates drop again," he says.
Berkowitz says because the economy is still slowing down, interest rates should continue on their downward trend once the rand has stabilised.
"This is a short-term hiccup rather than a long-term problem," says Berkowitz.
The bigger problem for the residential property market, he says, is a lack of confidence in the country.
Berkowitz says this, together with the crime rate, is something the government will have to address before the property market improves.