The cheap debt honeymoon may be over. So you must put more energy in clearing your debt to avoid financial disasters.
The South African Reserve Bank (SARB) governor Gill Marcus sent a chilling message yesterday with a decision to raise interest rates by a half percentage point which moves the repo rate from 5% to 5.5%.
The prime rate moves from 8.5% to 9% which can have significant consequences for household budgets. By way of example, a half percentage point increase to a rate of 9% on a R1 million bond, can translate to an increase in monthly instalment of about R300. The consequences escalate as you add other more expensive debt like car finance, credit card and personal loans.
The big question: Is this the beginning of an upward cycle in interest rates and how far high will rates go.
Remember the previous upward cycles. Marcus predecessor, Tito Mboweni, oversaw an upward cycle to a peak of 15.5%. The scarier prospect is in the memory of Chris Stalls who oversaw a cycle that raised interest rates from to a record high of 25%. In both cases a sliding rand seemed to have played a significant role. Marcus has very much cited a weakening rand in her justification of the hike. The rand has skidded over the past few days to cross the R11 against the dollar level adding to massive losses suffered during the course of 2013. As Marcus noted this raises inflationary pressures onto the South African economy.
Marcus noted that “The recent depreciation of the rand, if sustained, will raise significantly the risk to the inflation outlook. Our inflation forecast shows a marked deterioration, despite the absence of clear evidence of domestic demand pressures.”
But then South African’s should still count themselves lucky when compared to the Turkey situation. The volatile currency market saw the Turkish cost of debt, interest rates, rise by 50%.
Although word from observers does suggest that yesterday’s rise in South African interest rates may be the beginning of an upward cycle.
FNB CEO Jacques Celliers noted that “The last rate hike was in June 2008 when rates reached 15.5%. Since then, we have had almost five years of falling and stable rates”.
“Many of our peer countries have already hiked rates in expectation of further reductions in US Federal Reserve QE programme. They have done so to ensure domestic economic and currency stability.”
We encourage our consumers to set aside additional amounts in their budgets before mortgage and other payments fall due at the end of the month. The rate-hike is positive news for investor’s dependant on interest income; they have struggled under declining and stable rates in recent years.”
FNB Chief Economist Sizwe Nxedlana said “Despite fragile economic growth, muted core inflation and the fact that inflation expectations remain reasonably well behaved the SARB raised interest rates to restrain rising inflationary risks.”
Nxedlana added that “Households should budget wisely in anticipation of further interest rate increases.”