Are you prepared for the interest rate hike?
The Reserve bank has increased interest rates by 25 basis points. Market consensus had predicted that a hike was not expected. This was because economic data had been disappointing and because the inflation rate is within the target parameters.
Many economists now think the increase is the right decision in view of a possible increase in US interest rates next month and the possible effect on foreign investment. Some also believe that the Reserve Bank needs to stay ahead of the curve. The Reserve Bank governor says the committee had seriously considered delaying the increase and watching developments unfold. Such a delay, however, could have led to second round effects requiring an even stronger response.
Analysts are now divided as to whether rates will now hold for an extended period until late in 2016, or whether rates will reach 7.5% next year.
The effect of interest rates
The economic effect of the rate increase will be felt by the poor and middle classes. It was reported in The Times that 23.37 million South African are in debt and that the average consumer has four credit agreements. Furthermore, 5.2 million debit orders go unpaid every month.
The effect will be felt more by pensioners and those in the informal sector. Those in the middle income group are already under increasing pressure as pay increases are slowing down while food and electricity prices are increasing. The poor will also be hit hard, particularly as many have loans through micro-lenders at higher interest rates.
Consumer spending normally surges at this time of the year, on year-end holidays and seasonal festivities. Such expenditure will be curbed.
The farmers who are battling under drought conditions, normally rely on credit to see them through the poor season and prepare them for the next season. They will also feel the effect of the interest rate increase.
Macro-economic policies aside, is it good for the economy that debt cannot be serviced, that assets are repossessed or sold off at below market value to the highest bidder, that the retail sector experiences a downturn, or that farmers lose their farms? I think not.
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