Interest rate hike: bad news for consumers

Private Property South Africa

The Monetary Policy Committee delivered something of a shock yesterday when it announced that it was raising the repo rate by half a percentage point to 5.5 percent. The commercial banks in turn will raise their prime lending rates from 8.5 to 9%.

Notes Timothy Akinnusi, Divisional Executive of Nedbank’s Home Loans Sales & Client Value Management: “Although not entirely unexpected, a rate hike so early in the year did come as something of a surprise. The decision tells us a few things. It means that the economy is underperforming and that the Reserve Bank is attempting to address the issues of the depreciating Rand and inflation.

“What this means from a consumer point of view is that credit will cost more and will therefore have a direct impact on the cost of everyday living. Consequently, consumer spending and confidence will taper off as the impact of the rate hike begins to take effect. What is more concerning is that heavily indebted consumers may well be pushed over the edge and end up defaulting on their payments.”

Akinnusi’s comments are in line with FNB’s Household and Property Sector Strategist John Loos’ thoughts on the matter: “The impact should be seen as ‘negative’ from the consumer’s short-term point of view.

“As the positive impact of the big interest rate cuts has gradually worn off throughout 2012/13, both real household sector disposable income growth and real consumption expenditure growth have slowed. By now, we anticipate that these variables’ growth rates are not far from 2% and we anticipate average real consumption growth for 2014 more likely to move down into the 1 to 2% range for 2014. This would be down from the average growth rate of nearer to 2.5% estimated for 2013 as a whole.”

From a residential property market point of view, the hike may also be viewed as a negative, says Akinnusi, in that it may curb overall demand in the mid- to long-term. While unlikely to have an immediate impact, he adds that the hike should act as a warning to property owners and buyers not to over-extend themselves and buy properties they may not be able to afford in a year or two’s time.

“On the plus side the hike is of course good news for those who have money invested and saved with the banks,” notes Akinnusi. “That said, no doubt many consumers will be surprised by the announcement as they have been lulled into a false sense of security by the fact that the rates have remained unchanged for so long.

“It’s important to note that the hike may well set the tone for the rest of the year as interest rate hikes often occur in succession. To put things into perspective, each hike can represent as much as R500 to R1 000 impact on the mortgage repayments of the average consumer. As such, the most important message to take away from the announcement is that it’s time to get your house in order.”

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