Catastrophic consequences of rate hike

Yesterday’s interest rate hike of 25 basis points will cause all debt repayments, such as mortages and vehicle and credit card payments, to increase, putting additional financial strain on consumers, economists warned yesterday.
The hike announced by the Reserve Bank’s Monetary Policy Committee (MPC) brings the prime lending rate to 9.75%.
Further hikes in lending rates are forecast for 2016, said Jacques du Toit, senior economist at Absa Bank.
He said the hike came against the background of expected inflationary pressures due to the lagged effect of the severe drought on food prices, a weakening rand and the prospect of rising interest rates in the US before year-end and during next year.
Neil Roets, CEO of debt management company Debt Rescue, said the combination of the severe drought in prime food producing areas, coupled with the increase in the interest rate and the weakening of the rand, would have dire consequences for poor people.
He warned the repo rate hike could push food inflation as high as 10% with “catastrophic results for deeply indebted South Africans”.
In the past six months, the company has experienced higher growth rates of people who stack up debt they cannot repay and who are compelled to seek help from debt counselling, Roets said.
Professor Raymond Parsons of the North West University Potchefstroom Business School said the higher interest rate would have a negative impact on already low levels of consumer and business confidence.
“Furthermore, the global and domestic uncertainties referred to by the MPC argue against pushing SA further into a rising rate cycle at this juncture, rather than in favour of it.
“Several of these factors, such as the possible decision by the Federal Reserve to raise US interest rates next month, could have been reassessed at the MPC’s next meeting in January and not seemingly pre-empted at this stage,” Parsons said.
Independent economist Daw- ie Roodt said: “Deeply indebted consumers are incredibly vulnerable at the moment because of issues such as the weakening rand which is going to translate into increased prices for all imported goods.”
Bond originator ooba warned that the interest rate would negatively affect residential housing markets.
Kay Geldenhuys, ooba manager for property finance processing, said: “This decision will unfortunately negatively impact many consumers who are already facing increasing financial strain through dealing with elevated levels of debt and the rising cost of living expenses.” – Citizen reporter ► Additional reporting by Moneyweb

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