Keep low rates urges Consumer Forum

Economists forecast that interest rates will remain on hold at least until the second half of next year.

The Reserve Bank's monetary policy committee starts its three-day meeting on Tuesday (16 July), which will culminate in the delivery of a statement on Thursday (18 July) about interest rates.

A BDlive consensus forecast is for the repo rate to remain unchanged at 5% and the prime rate, which commercial banks charge on loans to consumers, to stay at 8.5%.

"For us it is important that rates do not increase for at least the next 12 months because if they do it will hurt a lot of consumers, especially those who are over-indebted or those who earn less than R10,000 a month," said forum chairman Thami Bolani.

The forum represents over 10,000 consumers and hopes to increase this number by opening more offices around the country.

Low interest rates have mainly brought relief to consumers with bond and car repayments as these loans are normally linked to movements in the repo rate.

Unsecured lending

However, the benefits have not been the same for consumers with unsecured loans, as interest rates applicable to such loans are generally significantly higher than those for mortgages, for instance.

The latest Bank data shows that the ratio of debt to disposable income was 75.4% in the first quarter of this year, indicating the extent to which a large amount of household income is going into servicing debt.

Although the forum has previously called for interest rate cuts, it said that this time it supports rates holding steady as it understands the "challenging" situation the Bank is in, trying to manage price stability while considering the sluggish economic activity.

"We expect the repo rate to remain unchanged considering that inflation has become quite a big threat," Bolani said.

Although the consumer price index, which measures inflation, eased to a 5.6% year-on-year increase in May from 5.9% in April, it is expected to edge higher in the coming months mainly as a result of higher petrol prices and the effects of the continued weakness of the rand.

"We know inflation hurts poor people the most," said Bolani. "It is important for us that inflation be controlled because this will protect the poor majority of this country."

The Bank's primary mandate is to use monetary policy to make sure that inflation stays within the targeted range of between 3% and 6%.

Economists say the expected increase in inflation should tie the Bank's hands in instituting any further monetary policy stimulus, while a weaker economic growth environment should prevent it from hiking rates too quickly.

Standard Chartered head of Africa research Razia Khan said the Bank could keep rates unchanged until the fourth quarter of 2015.

Khan said although it was highly unlikely, the possibility of another rate cut still existed.

"We think that the near-term outlook for easing is as high as 49%. It is very tight. There is not a strong reason for them (the monetary policy committee) to tighten rates anytime soon," she said.

Source: Business Day via I-Net Bridge