Buying spree ends in rate rise

Consumers will experience their first interest rate rise in nearly four years after Reserve Bank Governor Tito Mboweni took steps yesterday to cool South Africa's recent "buying spree" with a 0.5% increase in the official repo rate, to 7.5%.

The move, described as "disappointing" by Prof Bonke Dumisa, Chief Executive Officer of the Durban Chamber of Commerce, and "pre-emptive" by economist Johan Els, will push up the cost of borrowing and of doing business.

The announcement, which was immediately followed by several commercial banks pushing their prime lending rates up from 10.5 to 11%, will cost a householder with a R500 000 bond (over 20 years) an extra R169 a month (to a total of R5 161 a month) and a R1 million bondholder an extra R338 a month (to a total of R10 322).

But a house is not the only item on which borrowers will be paying more. Someone with a R200 000 car loan, repayable within 60 months, will pay R4 348 a month, or R49 more.

Surprise

The surprise announcement - only three of 19 economists polled by Reuters last week had forecast a rate hike - prompted sharp falls in share prices and government bonds. On the stock market the Top-40 index of blue-chip stocks dived 6.88% to 16 597.80 points, its lowest level since March 8 and its biggest one-day fall since April 2000, according to Reuters data.

Mboweni warned that the inflation outlook had worsened markedly and predicted that the benchmark CPIX gauge would breach the upper end of its target range next year.

In Durban Dumisa said it was disappointing that the SA Reserve Bank had increased rates at this stage, rather than hanging on for another three to six months.

This would affect business - it would fuel inflationary expectations and filter through to higher bus fares and other prices during the next few months.

Despite statements that this was not necessarily the beginning of a new cycle, Dumisa said the Reserve Bank would probably have to make further rate hike decisions in the months ahead. He would not be surprised if, after the next meeting of its monetary committee in a few months, the bank were to announce a further 1% rise in rates. These cost-push inflation adjustments would result in pressure on the 3%-6% inflation target.

He said the increase would also put pressure on those who had bought homes with large bonds necessitated by the escalation in property prices.

"An increase of R300 a month may not sound a lot, but it could have a significant impact on a tightly balanced budget. It will also translate into millions of rands in extra costs for large businesses."

Keith Wakefield, Durban-based Chief Executive Officer of Wakefields Estate Agents, said the rise had not come as a big surprise. "I think the market has already discounted the increase. This can be seen in the declining increase in house prices over the past months."

He said Mboweni needed to be complimented on his management of the interest rates.

"When he felt interest rates needed to be lowered he did so cautiously and likewise any further movement in interest rates will be conservative.

"This rise of half a percent will take a little bit of steam out of the economy, which is good and was needed as it was expanding a little too fast."

Johan Els, of Old Mutual Asset Managers, said the increase was the first since September 2002, when the rate was raised from 12.5 to 13.5%. Since then, there had been seven cuts to a 25-year low of 7%. By historic standards, the level of interest rates is still modest and Christo Luüs, of Absa, felt the increase would not affect consumers significantly.


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Article by: TONNY MAFU, ETHEL HAZELHURST, Reuters & Mercury reporters