Low interest is tough on pensioners

2013-11-27 00:00

THE Reserve Bank Monetary Policy Committee’s (MPC) recent decision to keep the repo rate at five percent is good news for most, especially those with high debts, but bad news for pensioners who have to rely on cash savings to live.

The MPC decided at its last meeting of the year, to keep the repo rate at five percent.

The repo rate is the interest rate at which the Reserve Bank lends money to commercial banks. No change means the banks keep the prime lending rate at 8,5%.

Interest rates have not changed since July 2012, 16 months ago. Debt has never been this cheap for many decades.

“A stable interest rate is good news for consumers and the housing market,” said Seeff chairman, Samuel Seeff in a statement.

While there have been some calls to lower the interest rate even further to stimulate the economy into growing faster, Seeff argues this will result in short-term overspending, “something we don’t need right now”.

One in four South Africans are unemployed and nearly half the consumers with outstanding debt have impaired credit records.

With the economy slowing rather than growing strongly, there is little chance for these consumers to measurably improve their disposable incomes soon.

Economic growth prospects are looking glum. Last month Finance Minister Pravin Gordhan revised downwards the GDP growth forecast for 2013 to 2,1%, while Reserve Bank governor Gill Marcus on Thursday revised downwards the bank’s forecast for the year even lower, to 1,9%.

Traditionally, low interest rates have prompted consumers to spend more.

First National Bank household and property strategist John Loos said the low interest rates have stopped stimulating consumer demand, and it has also ceased promoting housing demand and house prices.

However, because consumers have taken on so much debt in recent years, “it was important that consumer credit growth subsides”, said Loos.

The bad news is the low interest rates are not yet causing debt and consumer savings levels to improve.

Old Mutual Investment Group (South Africa) chief economist Rian le Roux said the decision to hold rates at current levels means consumers don’t face the risk of rising interest rates in the short term.

The low interest rates gives consumers time to manage their money properly before interest rates go up again.

Le Roux said the low repo rate was bad for pensioners who rely on the interest on their cash savings to live, because while the interest rate is static at present, inflation rises every year.

“Retired people either need a very large amount of cash so their expenses are comfortably exceeded by interest income, or they need to find a way to grow their money … dividend growth [from shares on the stock market] has traditionally grown in line with inflation,” said Le Roux.

“It is vital that consumers start saving … now more than ever, we would encourage home owners to invest their bonuses and any spare cash into their home loans, something that will stand them in good stead to weather future interest rate hikes,” said Seeff.

Le Roux said the main upside risk to inflation is the rand’s exchange rate — when the rand weakens, the price of imported goods rises. Rising inflation may cause interest rates to rise again.

There are fears the rand may weaken further if global investors pull their investments out of emerging markets, as a response to U.S. central bank plans to scale back the $85 billion (around R850 billion) it spends every month on buying back government bonds.

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