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Press Offices > Banks & Building Societies

First National Bank
Press Office Feature : Unchanged Repo rate: The best option for the household sector

Company: First National Bank
Author:John Loos
Email:[email protected]
Posted:18 Jul 2013

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Consumers should actively try to lower debt-to-disposable income ratio while interest rates are low

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 not far from the upper target limit (6%) at 5.6% in May.

The Governor yet again pointed to downside risks to local economic growth, already battling along at below 2% year-on-year, and the Bank actually lowered its 2013 GDP growth forecast to 2.0% from 2.4%.

Weak growth is a factor that has kept interest rates at multi-decade lows for some time now, and which leads us to believe that interest rate hiking is some way off.

However, while seeing downside risks to economic growth, the SARB still sees upside risks to inflation, with the threat of a wage-price spiral, as a result of high wage demands, still there, while a volatile rand has also been in play.

Indeed, at the present time, the Consumer Price Inflation rate of 5.6% hugs the SARB's upper target limit of 6%, and the average wage settlement (according to Andrew Levy) accelerated from 7.6% in 2012 to 7.9% in the 1st quarter of 2013. Such pressures,  leave the Bank little room to maneuver in terms of rate cutting.

The implications of today's unchanged interest rate decision are believed to be a further slowing in real household disposable income, as the effect of prior rate cuts wears thin, a more-or-less sideways movement in the household debt-to-disposable income ratio, and no further meaningful improvement in household debt servicing (repayment) performance.

An unchanged decision also means that the combined fiscal and monetary policy impact on household sector finances remains negative, with the effective personal tax burden relative to income rising further in 2013.

The FNB view is that we are now in a lengthy period of stable and unchanged interest rates that is expected to last through the rest of 2013 and well beyond.

With consumer price inflation near the upper target limit of 6%, the SARB has little room to move in the form of further interest rate cutting at present.

The best option for the household sector?

We remain of the belief that the household sector should actively try to lower its debt-to-disposable income ratio  while interest rates are low.

A scenario of a rising personal tax bill along with utilities tariffs, relative to income, probably means that a lower level of household sector indebtedness is now appropriate from a financial health point of view.

So, while the normal response is often 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.

While the most recent debt-to-disposable income ratio for the household sector stood at 75.4%, which is down from the 2009 peak of 83%, it remains high by SA's historic standards.

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