20 July 2012

South Africa: Rate Cut Surprises, Delights South Africans

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South African twenty rand note.

Johannesburg — South Africans were surprised and for the most part delighted by the Reserve Bank's decision on Thursday to cut its interest rate for banks, known as the repo rate, by 50 basis points.

This was the first reduction in interest rates since November 2010.

FNB's property spokesman John Loos said he was surprised by the decision as he had only expected a possible interest rate cut in September.

He had some reservations about the appropriateness of the cut at the present time, although it could be a mildly positive stimulus for the residential property market.

"Interest rate policy should be used to address any macro-economic imbalances/excesses that may develop from time to time, and which can threaten price and macro-economic stability if allowed to go too far."

Consumers were too highly indebted, with debt-to-disposable income at 74.7 percent.

Interest rates should be at a level that encouraged debt to decline.

If the economy entered another cycle of hiked interest rates, consumers and the residential property market would experience financial pain.

FNB Home Loans spokesman Ewald Kellerman said households should use the lower rates to strengthen their balance sheets.

"This may mean trimming the debt levels and increasing the savings rate."

As many as 20 percent of sellers in the residential property market were downscaling due to financial pressure.

Kellerman said buyers should acquire property that was well within their means, in order to absorb a significant degree of future rate increases.

In addition, costs related to housing, such as rates, were escalating at a higher rate than consumer price inflation.

Business Unity South Africa (Busa) welcomed the decision to cut rates, as global growth was slowing and the Eurozone crisis continued.

"Busa believes the decision to lower interest rates will support an economic recovery," it said.

Busa's expectations for 2.7 percent growth for 2012 were in line with the Reserve Bank's forecasts, with inflation remaining at around five percent.

"The cut in interest rates sends an important market signal and should assist in boosting investment, consumption and business confidence," it said.

The SA Chamber of Commerce and Industry's spokesman Chose Choeu said the rate cut would alleviate cost pressures on households and business, particularly small and medium enterprises.

But it was unlikely to significantly improve economic activity.

"The cut is also a welcome indication that long-term inflation is expected to moderate," he said.

Unions and the United Democratic Movement welcomed the decision.

"This interest rate cut will improve consumer confidence and help stimulate economic activity," said UDM spokesman Nqabayomzi Kwankwa.

Kwankwa noted that inflation was moving downwards and consumer confidence had dropped.

The Independent Municipal and Allied Trade Union (Imatu) said it was "elated" by the decision.

"Given the prevailing inflation stability, an interest rate cut will give our financially strapped members some much-needed economic reprieve," said Imatu spokesman Johan Koen.

But the decision, along with reduced prices for petrol and diesel, would not necessarily translate into tangible savings for its members.

"South Africans are still battling to meet high food, fuel and electricity prices," he said.

The cost of a basic food basket had increased by an average of 16 percent every year for the last five years.

Electricity had "effectively increased" by over 80 percent in the last three years, petrol prices had gone up by 11 percent every year for the last decade, and Metrorail had increased the cost of train tickets by an effective 69 percent in the last three years, said Imatu.

The Federation of Unions of South Africa (Fedusa) also said it was elated by the decision.

"This decision is testament to the fact that the Monetary Policy Committee is at last recognising the need to cut interest rates in order to stimulate consumer spending, economic growth and job creation," it said.

Fedusa was glad that the bank had realised the importance of consumer spending to economic growth and job creation, said spokesman Dennis George.

It had called for an interest rate cut for the last seven quarters, as food and energy inflation caused suffering for its members.

"Although we would argue the repo rate cut should maybe have been a bit more generous, we feel that it would give much-needed relief to many households and SMEs (small and medium enterprises)," said George.

The United Association of SA (Uasa) welcomed the cut, but urged government and business to work with unions to strengthen the economy.

"This was an unexpected move, but will bring much-needed relief to the South African workers and consumers," it said.

"While this is good news for the average South African, we agree with the governor of the SARB, Ms Gill Marcus, that our economy is weakening and not enough jobs are [being] created."

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