Rate increase cycle looms

2011-04-20 00:00

WHILE consumers have revelled in the 30-year-low interest rate level — viewing it as a financial lifeline — the next rate hiking cycle is rapidly gathering momentum.

Several economists and analysts are speculating that the next cycle will take the form of smaller hikes — perhaps in the region of 25 basis points (a quarter of a percentage point) rather than 50 or 100 basis points.

Although painful, this prospect would come as a blessing to South African consumers, who in the main have not taken full advantage of the lower interest rate environment. South Africa’s household debt-to-disposable income ratio remains at a worryingly high level.

FNB’s chief economist, Dr Cees Bruggemans, believes there is a strong case for a milder rate hiking cycle.

FNB property strategist John Loos also expects a milder rate hiking cycle, as does Craig Pheiffer, general manager at Absa Investments.

Pheiffer told The Witness that the tightening phase of the interest cycle amounts to 250 basis points, which is less harsh when compared with previous hiking cycles. Like some analysts, he expects the increases to take the form of 50 basis point steps.

Experts expect the South African Reserve Bank’s monetary policy committee (MPC) to raise the interest rate in the final quarter of 2011 or the first quarter of 2012.

The key reason for this expectation is the threat of rising consumer inflation on the back of higher crude oil and fuel prices, among other price pressures.

Bruggemans noted that the time may have arrived for a milder touch from authorities who make such decisions.

He pointed out that certain sectors of the economy remain vulnerable as they have not emerged fully from the recession, adding that inflation is still expected to remain by and large within the MPC’s target range of three to six percent — despite concerns over rising crude oil and agricultural commodity prices.

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