Retire debt before rates cycle turns

Debt stricken consumers will be well advised to retire a significant portion of their debt now with indications that the interest rates cycle has reached its nadir and will remain flat over the next few months with a possibility of an upward movement in the medium term.

This view comes on the back of the Reserve Bank’s Monetary Policy Committee (MPC) decision to live the repo rates unchanged at 5% and citing rising inflationary pressures as a contributing factor. This lives the prime rate at a record low of 8.5%.

Bobby Malabie, Chief Executive of Absa Retail and Business Banking, advised consumers to focus of retiring debt. The decision to leave rates unchanged brings no further relief to consumers but keeps interest rates at historic lows.

“The debt ratio has increased to 76,3% in the 2nd quarter from 75,6% in the 1st quarter. The growth in real household disposable income slowed down to 3% in the 2nd quarter from 3,3% in the 1stquarter. We encourage consumers to concentrate on paying off any debt because the lower the interest rate is, the more of the principal amount you are paying back with each repayment,” continues Malabie.

According to the latest NCR’s Credit Bureau Monitor, of the 19.49 million credit active consumers, 46.4% have impaired records. An impaired record is a record on which a consumer and/or any of their accounts, are either classified as three or more payments or months in arrears.

Arrie Rautenbach, Absa Head of Retail Markets says stable rates provide for an opportunity for homeowners with a good credit standing to maintain their current rate and pay off their loan faster.

He advised consumers not to reduce repayments on their home loan. “If anything, you need to lift repayments to get further ahead – build a buffer in your offset/redraw accounts. You can access it later if necessary.”

Many consumers are also still battling with impaired credit records, which impact the accessibility of mortgage finance.

“We encourage consumers to concentrate on using any excess income to consolidate existing debt and not to over commit on loans or credit that is beyond their means”, said Rautenbach.

Inflation registered a rise from 4.9% in July to 5% in August driven mainly by food and transport costs. Economists said inflation expectations have remained anchored around the upper limit of the inflation target band of 3%-6%.

Nedbank Economic Unit said the MPC’s decision was in line with market expectations. “The domestic economy is weak, impacted negatively by global factors and domestic supply disruptions. However, inflationary pressures are rising, stoked by rising food and fuel prices. This conflict will most likely keep monetary policy neutral over an extended period. We believe interest rates will remain unchanged for the remainder of this year, with a reversal in policy easing likely only late in 2013”

Reserve Bank governor Gill Marcus issued a downward revise of South Africa’s economic growth outlook pointed out that the weak global environment continues to pose a risk to the domestic economy, while the inflation outlook has remained largely unchanged compared to the projections at the time of the July meeting. CPI is projected to average 5,3% in the fourth quarter of 2012 and average 5,2% in 2013 and 5,0% in 2014.  That is if the rand, fuel and food prices behave accordingly.

Nedbank Economic Unit said the rand could come under pressure if the current account deficit deterioration is not reversed in the next few months.

The Reserve Bank also revised economic growth downwards. It projected GDP growth of 2,6%in the whole of 2012 from the previous previously 2,7% and 3,4%  in 2013. The risk to the growth trajectory remains on the downside as the European sovereign debt crisis, which poses a risk to the global economy, remains unresolved said Nedbank.

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