Squeeze to get tighter

CONSUMERS will have to dig deep to keep afloat after an increase of 25 basis points in the interest rate was announced yesterday. The new rate at which the Reserve Bank lends to commercial institutions is 6.25%, with the prime lending rate as generally charged by banks rising to 9.75%

The increase caught many economists by surprise.

And its announcement was immediately followed by warnings about the effect of the hike on a wide range of items, with the most dire being on food inflation reaching as high as 10%. That alert came from Debt Rescue chief executive Neil Roets, whose company is a major debt management operation.

Roets said the combination of severe drought in prime foodproducing areas coupled to the rise in the interest rate and the weakening of the rand would have dire consequences for the poor.

“It is patently obvious that the few fuel decreases we have had have been vastly overshadowed by the massively high unemployment rate and the overall increase in the cost of living,” Roets said.

“Although a quarter of a percentage point increase in the rate banks pay to the Reserve Bank to borrow money does not sound like much‚ it comes on the back of a whole slew of other price increases.”

Roets drew attention to food and imported commodities that had been negatively impacted by the drop in the value of the rand against all major currencies.

Debt Counselling Association of SA president Paul Slot said repayments on bonds of R500 000, R1-million and R2-million would increase by R82.50, R165 and R330 a month respectively, so cutbacks in other areas would be necessary.

But he asked: “Where do you cut? You have to pay water and electricity which is going up along with school fees and food.”

FNB strategist John Loos said yesterday’s increase was one of many still to come, with the interest rate possibly “reaching 10.5% towards 2017”.

Lew Geffen Sotheby’s International Realty chairman Lew Geffen said the rise was a double-whammy for cash-strapped home owners.
“A rise of 25 basis points is not large in itself, but this will be the third increase in little over a year and, when one factors in the 8% to 11% increase in transfer fees imposed to swell government coffers, it puts immense strain on the housing market … so 2016 will not be an easy year for home owners.”

Eastern and Southern Cape reaction was mixed.

Nelson Mandela Bay Business Chamber chief executive Kevin Hustler said there had been a 50/50 probability that the rate would rise and “it appears to have been necessary to help curtail inflation”. The chamber believed the rise was a prudent decision in line with current conditions in the economy.

Hustler said: “We are hopeful that the move will put a brake on the depreciation of the rand, if only in a small measure.”
George Business Chamber president Dr Willie Cilliers said he was pleased that the hike was “only” 25 basis points.

“The George economy comprises mostly small businesses and I expect them to feel the impact by February/March next year. The increase will impact on consumer spending patterns.

“I also don’t expect the increase to be passed on to consumers by businesses, so I think that there will be negative impacts on business, and especially on businesses which need access to capital from banks,” he said.

But the poor and those with overdraft facilities would feel the pinch. Cilliers said a positive factor for the Southern Cape region was that it had the highest rate of growth in the Western Cape and was one of the biggest growing economies in the country, with the current growth rate of about 21%. Sundays River Valley Business Chamber chairman Flippie Ehlers said the rates hike was both good and bad for the region.
As the home of the export-driven multimillion-rand citrus industry, the region had benefited from the weak rand, while people’s savings – particularly those of private pensioners – would benefit from the rise in the rate.

But Ehlers warned: “The poorest of the poor will, on the other hand, be badly affected.”

Ehlers was particularly concerned about the substantial number of poor, including seasonal pickers, in the Sundays River region.

Meanwhile, economist Mike Schussler said while those in the formal sector would probably be able to absorb the increase, it would severely affect pensioners and those in the informal sector.

“Overall people will be paying more with less money to spend,” Schussler said.

“People over 65 will struggle to get loans as lenders will be concerned about their ability to repay. “Their repayments will be beyond the 25 basis point increase and will more likely be around 50 and 75 basis points, which will make repayments incredibly difficult.”

On the middle class, Schussler said the hike came at a time when salary increases in the middle-income group were slowing down. Of the effects on the poor, he said: “Many have loans through microlenders, whose repayments are steep.”

On food, Pietermaritzburg Agency for Community Social Action director Mervwyn Abrahams said its food price barometer showed that poor households under-spent on food by 55.6%, with food running out by the second or third week in the month.

Abrahams said the increase would result in a major squeeze, with even less money available for essential goods and services such as food, transport, municipal services and education.

Source – http://www.nmbbusinesschamber.co.za/blog/posts/squeeze-to-get-tighter

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