Dire financial outlook for consumers

2011-04-09 11:24

Economists have warned South ­African consumers to stay clear of debt or fix interest rates on their loans as the South African Reserve Bank is set to hike interest rates in the coming months.

Already, central banks across the world have started raising interest rates in a bid to quell inflationary pressures which have been building up due to surging food and oil prices, with petrol prices in South Africa ­rising by 27% since the beginning of last year.

The International Monetary Fund warned this week that if demand for oil continued to outstrip supply, the oil price could spike to the record high of $148 a barrel it hit in 2008, which sparked runaway inflation and led to central banks tightening interest rates across the globe.

Industrial Development Corporation chief economist Lumkile Mondi said he expected interest rates to go up by 50 basis points in September.

“The period of low interest rates is over. Interest rates are not going to go down going forward. I expect ­interest rates to start going up in ­September,” he said.

He advised borrowers to fix ­interest rates on their loans, ­especially on credit taken out to ­purchase expensive homes and cars.

“If you have a house that costs R10?million and interest rates go up by 50 basis points, it makes sense to fix your interest rates because such an increase, as small as it may be, could translate into a lot of money,” said Mondi.

Kabelo Masike, a senior economist at power utility Eskom, said he ­expected the central bank to raise ­interest rates in January next year.

“Our view is that interest rates are going to go up in January next year. My advice to the consumers is to get out of debt and save more,” warned Masike.

Consumers have been enjoying the lowest interest rates in 30 years after the central bank cut the benchmark repo rate by 650 basis points between December 2008 and December last year. The bank left the repo rate ­unchanged at 5.5% last month.

But a bleak inflation outlook points to higher interest rates and central banks are acting accordingly.

This week, the European Central Bank upped interest rates by a ­quarter of a percentage point (to 1.25%) to tame inflation.

On Tuesday, China, a member of Brics – a group of emerging countries including Brazil, Russia, India, China and South Africa – raised interest rates for the fourth time since ­October, and so did India.

Poland and Sweden have also tightened their monetary policies.

Standard Bank chief economist Goolam Ballim has predicted that ­interest rates could rise sharply next year.

He said: “I think there are going to be three interest-rate hikes next year of 50 basis points each.

“The first interest-rate hike could be in January and the second rise could be in March, and the third in July.”

Ballim said high food prices, rising fuel costs, and a potential weakening of the rand posed a risk to South ­Africa’s inflation outlook.

Gavin Opperman, the chief ­executive of Absa Retail Bank, said banks could be forced to review their lending criteria if interest rates rose sharply.

Opperman said: “If interest rates were to go up by 150 to 200 basis points in the short term, banks will have to review their lending criteria as the affordability of consumers will become more strained. However, we don’t see interest rates rising to those levels.”

Opperman said Absa expected ­interest rates to climb by 50 basis points in the last quarter of this year, an increase that could be absorbed by the market.

But a series of interest-rate hikes could pose a challenge for distressed homeowners.

Despite interest rates being at 30-year lows, Absa has handed over about 20?000 residential properties which are in arrears to debt ­collectors. Opperman said that roughly 70?000 properties in the ­entire banking industry were in the “distressed” status.

Pat Lamont, the general manager of Nedbank retail, has projected ­interest rates to rise but that the impact would be subdued.

Lamont said: “The risk of an earlier hike has increased due to rapidly rising food, fuel and electricity tariffs, which could push the inflation rate to above 6% by the end of this year.

“The impact of these, however, will be mitigated by a lower debt servicing burden on the back of historically low interest rates and rising household incomes in the short term.”

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