RSS Feeds RSS | Views on ITInews | contact | terms of use | privacy 

Editorial Categories:


Become a Private Client at FNB

Forthcoming Events:

No Upcoming Events

FNB sponsors the homecoming revolution

Available Recruitment:

No Vacancies Listed...

Save by getting insurance quotes

Your Editor, Brent WilsonInforming Consumers and Financial Advisors since 1988 | Click Here to Advertise
How can we help you
Press Offices > Banks & Building Societies

First National Bank
Press Office Feature : Unchanged interest rate decision

Company: First National Bank
Author:John Loos
Email:[email protected]
Posted:23 May 2013

 Email this article Comment on this Article  Print this article

Keeps the cumulative impact of monetary and fiscal policy on household sector negative

The Reserve Bank 's(SARB) Monetary Policy Committee (MPC) concluded its interest rate meeting today, and the outcome was a decision to leave its policy Repo rate unchanged at 5%, not surprising with consumer price inflation still testing the upper target limit (6%) at 5.9% in April.

The Governor yet again pointed to downside risks to local economic growth, with the Bank actually lowering its 2013 GDP growth forecast to 2.4% from 2.7%, a factor that has kept interest rates at multi-decade lows for some time now, and which leads us to believe that a further cut later this year may be on the cards.

However, she also expresses concerns regarding the threat of a wage-price spiral, as a result of high wage demands, and possible upside risks to inflation.

Indeed, at the present time, the Consumer Price Inflation rate of 5.9% hugs the SARB's upper target limit of 6%, leaving the Bank little room to maneuver in terms of rate cutting, should it wish to retain its inflation targeting credibility.

Implications for the Consumer

  • Expect real disposable income growth and real household consumption growth to continue to slow:

A rates unchanged decision appears more or less neutral for household /consumer demand at present. Little movement in interest rates since 2009/10 means that the stimulus to economic and real household disposable income growth from prior interest rate reduction has more or less worn off, and we've seen a tapering off in real consumer demand growth and in real retail sales growth.

This broad slowing in real consumption growth, especially the durable goods component, is expected to continue in the near term as the lagged positive impact of prior interest rate cuts continues to wear off.

  • Slowing household deposit growth suggests that we should expect little in the way of further decline in net interest paid, unless interest rates decline further in future:

In recent times, we've seen growth in the value of household deposits slow down more or less into line with household credit growth, after a period of "balance sheet rebuilding" saw deposits growth outstripping credit growth through 2011 and much of 2012.

This means that growth in household interest received no longer outstrips growth in household interest paid.

Therefore, net interest paid by households (interest paid minus interest received) remained almost unchanged in 2012 at 1.4% of household sector income, after a slightly higher 1.5% in 2011, and would be expected to do so in the near term at current interest rate levels.

  • The unchanged interest rate decision keeps the overall monetary and fiscal policy impact on the consumer negative:

While the monetary policy impact on households in the near term may be more or less neutral, it keeps the "combined monetary and fiscal policy impact" on the household sector firmly negative.

The reason is a pressured government fiscal situation, which is leading to it imposing rising effective tax rates on the household sector.

This is done through often not providing sufficient annual tax relief to fully compensate for inflation-related "bracket creep".

So, from a low point of 11.3% of household income in 2004, household income and wealth taxes have risen to 13.6% by 2012, the highest percentage since 1999, and 2013's small tax relief of R7bn suggests further increase to come in this percentage in 2013.

Put the interest and net interest costs together, and we see a total tax and net interest payments bill of 15.1% of household sector income in 2012.

This is admittedly down from the interest rate-driven highs of 2008/9 but now rising once more since 2011, and far higher than the lowly 11.8% reached in 2003.

This tax rate, of course, does not include municipal rates or utility tariffs. Latest CPI inflation numbers still show these growing well above overall inflation, electricity tariffs at 10% year-on-year in April, and "water and other services" (which includes municipal rates) by 9.2%.

However, not all the blame for the rise in the taxes and net interest burden can be placed on the authorities.

Higher levels of indebtedness relative to household deposit levels has meant that, although interest rates are now lower than in 2002, that year saw net interest payments of only 0.1% of household income, with interest received being almost equal to interest paid by the household sector, because deposits were significantly higher relative to debt back then.

So if the household sector wants to become less dependent on low interest rates (and less sensitive to interest rate hikes) it is necessarily to develop more of a savings culture.


The policy solution to a rising interest and tax burden, however, would not be to cut interest rates further in order to compensate for higher tax and tariff burdens.

This would only serve to compound the household savings problem further.

Rather, higher interest rates would probably be more desirable, encouraging less borrowing and higher saving, accompanied by lower tax rates, with government rather resorting to major efficiency improvements to free up financial resources..

But having said that, what is desirable from a household sector "health" point of view and what is likely are often two different things, and the FNB view is that the 2nd half of 2013 may well yield a further interest rate cut as a weak global economy suppresses global and local inflationary pressures mildly.

The risks to our forecast of a further rate cut would be posed by:

  • High wage demands
  • A currently volatile rand

In addition, a rising government debt-to-GDP ratio, and this year's limited nominal tax relief of R7bn (down from R9.5bn in 2012) is not expected to fully cover inflation-related bracket creep, thereby making it likely that the household tax burden will rise further as a percentage of household income.

Overall, therefore, unchanged interest rates probably implies that the combined impact of monetary and fiscal policy will remain negative for the household sector for the time being.

The best option for the household sector?

Besides measures aimed at reducing usage of utilities' services such as water and electricity, a scenario of rising tax and utilities tariffs relative to income probably means that a lower level of household sector indebtedness is now appropriate.

So, while the normal response of the household sector is to borrow more when interest rates are low, a more preferable option may well be to use the low interest rate environment to lower the debt-to-disposable income ratio.

In 2012, the debt-to-disposable income ratio started to rise slightly after having fallen somewhat in prior years, as household credit growth accelerated on the back of cheap credit.

At 75.8% by year end I believe this ratio still to be too high for comfort.

Also important to realize is that, although the SARB looks at many factors when deciding on interest rates, households need to be aware that their borrowing behavior can in part influence the SARB's decisions.

Should households drive strong growth in consumer-related credit (and thus spending), which at some point can feed into inflation, they can be the partial cause of higher interest rates. The converse can also be true.

Recently, however, there are positive hints that household credit growth may be slowing after some "verbal intervention" by the authorities aimed at lenders in the unsecured lending space.

Hopefully such a slowdown can be achieved, which would perhaps lessen the need to raise interest rates in future in order to "stop the party".

There are no comments at this stage. Be the first to comment!
Please Login To Comment On an Article - Click here To Login

ITInews invites comments at the foot of each of its articles in which readers can respond freely - anonymously if they wish - to various topical issues and industry debates. However, comments submitted by readers that are defamatory or deemed, by the editors, to be racist or obscene will be deleted from the database. Furthermore, ITInews's editor would like to caution potential posters on its websites that while it welcomes robust debate, it will not hesitate to make the IP addresses of the authors of such defamatory statements available to the authorities, in the event of a court order compelling them to do so.

Get car, home, life and business insurance quotes in 3 easy steps

First National Bank

Get the One Account from First National Bank

More from First National Bank
Overview - 2016 National Budget
We are probably too late to implement and display evidence of growth
FNB makes tax-free saving quick and easy
Our top tip for saving is to pay yourself first
Sluggish economy to keep the small business sector highly vulnerable
Never assume that a loan is the only way out of tough times
Rate hike will bring in greater consumer caution
Households should budget wisely in anticipation of further interest rate increases
Silly Season profits can make or break your business
The holiday season is the busiest time of the year for many coastal business owners
Key drivers of residential property selling
FNB estate agent survey reasons for selling property
Unchanged Repo rate: The best option for the household sector
Consumers should actively try to lower debt-to-disposable income ratio while interest rates are low
FNB launches first scalable banking website in Africa
The new website will be available to the public on Sunday 14 July 2013
Inflation still impacts more on low income groups
At a time when the risk of social upheaval is not insignificant
FNB appoints new Chief Economist
Sizwe Nxedlana

Archived Articles featuring this company ...

Insurance Quotes

Car Insurance Quotes
Household Insurance Quotes
Business Insurance Quotes
Funeral Insurance Quotes
Life Insurance Quotes

Read the InsuranceQuotes Blog
ITM Website Design Cape Town
Copyright © 2005 - 2015 ITInews Online Publications (Pty) Ltd. All rights reserved Insurance Times & Investments Online and ITInews. ..::ISSN 1995-1256::.. No part of the materials including graphics or logos, available in this Web site may be copied, photocopied, reproduced, translated or reduced to any electronic medium or machine-readable form, in whole or in part, without specific permission from ITInews Online Publications (Pty) Ltd. Distribution for commercial purposes is prohibited.