Will Marcus cut us some slack?

2011-09-17 13:18

Default rates have declined dramatically, resulting in bad loans in the banking sector falling sharply thanks to 10 interest rate cuts by the Reserve Bank between June 2008 and November last year.

Now consumers and businesses are hoping that Reserve Bank governor Gill Marcus will reduce interest rates next week to further lower the level of indebtedness.

Marcus will chair the Reserve Bank’s Monetary Policy Committee meeting, which will decide what to do with interest rates in the face of a sluggish economic growth, high unemployment, and rising food and fuel prices.

The Credit Bureau Monitor, which is published by the National Credit Regulator, showed that 18.6 million South Africans were credit active and that 8.6 million consumers had impaired records.

However, thanks to 10 interest rate cuts by the Reserve Bank between June 2008 and November last year, the default rate
declined sharply.

Statistics South Africa figures showed the total number of civil judgments recorded for debt decreased by 28% in the second quarter of this year. Local lenders were owed a combined R1.21 trillion by consumers.

Economists would like to see the central bank governor giving the economy a stimulus in the form of an interest rate cut, a move that could put more cash in the pockets of consumers, helping them to either reduce their debt or increase spending.

Zandile Makhoba, an economist from Econometrix, said distressed borrowers could be the biggest winners if Marcus cut rates.

“If the repo rate goes down, households are less likely to get more bad judgments and civil summonses.

“Lowering interest rates would benefit households because prices of essential goods such as food and fuel have been increasing,” she said.

Her comments were supported by banking executives, who said that a rate reduction could improve the health
of struggling borrowers.

Sim Tshabalala, the deputy chief executive of Standard Bank group, said an interest rate cut should be positive for both consumers
and businesses.

“Financing and debt servicing costs should decline, impacting on the cost structures of households and businesses,” he said.

Gift Manyanga, the chief executive of EasyPlan, First National Bank’s low-cost banking unit with 117 branches, said: “An interest rate cut could provide major relief to those customers who were on the borderline of credit affordability. The improved affordability may reduce chances of customers defaulting on their debts.”

Makhoba said the growth in household credit extension was starting to flatten and this could imply that households no longer had an appetite for new credit.

She added: “I, however, do not think interest rates will be lowered because consumer inflation has been on an upward trend and is likely to breach the Monetary Policy Committee’s target of 6% later this year or early next year.”

Consumer inflation last month was hovering at 5.3% year on year.

Her comments come after some central banks in the Brics bloc of countries – Brazil, Russia, India, China and South Africa – this week hiked interest rates.

The Reserve Bank of India on Friday pushed the repo rate up for the 12th time since March last year by 25 basis points to rein in high inflation.

However, Russia’s central bank this week unexpectedly chopped the repo rate to 5.25% and Brazil reduced it to 12%.

Eskom economist Kabelo Masike did not think interest rates would be lowered.

“If they are changed, this will not have a significant macroeconomic impact. It is hard at this point to think that they will be changed because credit activity levels are benign.”

He said the anchor of South Africa’s inflation regime was inflation, which was rising.

“In the event of an extreme downturn, the Reserve Bank would lower interest rates. But this is highly unlikely because I don’t think the economy has reached dire straits,” said Masike.

“Though things are difficult in our economy, they do not warrant a rate cut at the moment,” he said. 

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