Consumers cheer repo rate cut

2010-11-20 10:30

The Reserve Bank’s decision to cut interest rates by 50 basis points this week brought relief to millions of indebted consumers, but left savers poorer.

Deputy chairperson of the South African ­Savings Institute Sheshi Kaniki said: “Low ­interest rates could discourage some ­consumers to save ­because they are going to get a lower return for their bank savings.

“When the Reserve Bank reduces the interest rates, pensioners are negatively impacted because they draw a fixed monthly income and have invested their capital in fixed deposit bank accounts.”

Labour federation Cosatu spokesperson Patrick Craven said more cuts were needed.

“The scale of this national economic crisis ­dictates that further cuts will be necessary early in 2011 if we are to stimulate new investment in the ­manufacturing industry and save existing firms which are struggling with their interest ­repayments and faced with shedding jobs,” ­Craven said.

But debt-ridden consumers were all smiles after Thursday’s decision, which meant that the ­likelihood of repossessions were reduced because consumers are less likely to default on their debt.

“Consumers would also get more room to recover from the economic crisis and debt, ­especially while the economy is still struggling,” said Kaniki.

He said he hoped consumers would save up a portion of their money instead of spending the ­extra cash on consumption.

The Reserve Bank on Thursday trimmed the ­repo rate – the rate at which it lends to commercial banks – to 5.5%. The prime lending rate – used by the commercial banks to lend to consumers – was reduced to 9% from 9.5%.

Business Unity SA deputy chief executive ­Raymond Parsons said the cut was a positive ­development mainly for small businesses that struggled to repay their debt.

“The cost of financing business has been further reduced and this, in a small way, strengthens ­business confidence,” he said.

Businesses were also relieved because fewer consumers are likely to default and those who are not heavily indebted may start to spend – a crucial development given that consumer spending ­accounts for 60% of gross domestic product.

This means that consumer spending can lead to economic growth and job creation as ­businesses try to meet demand.

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