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Rate cut: Homeowners save R4.6bn a year

Jul 22 2012 11:06 Mari Beukes and Niel Joubert

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Johannesburg – The importance of the 0.5 percentage point interest-rate reduction during the past week lies not only in the money put back into consumers’ pockets, but also in the confidence that it creates that someone is prepared to do something about the lacklustre economy.

The prospect of further cuts also boosts confidence and some economists reckon more cuts must follow to stimulate a spending cycle.

The total saving on home loans is rather small – about R4.6bn a year or around 0.15% of the gross domestic product (GDP) – and it won’t make much that much of a difference to the economy, says Economists.co.za economist Mike Schüssler.

If other loans are taken into account, the saving could amount to R8bn a year or just under 0.3% of the GDP. “That is the overall effect. The net effect is considerably smaller because savers will earn less. So the net effect is probably less than 0.1% of the GDP.”

“It's important to note that it's a matter of confidence,” says Schüssler. “The economy does not look good and the Reserve Bank had to do something. The amount may be small, but it means a lot for sentiment. People feel someone cares and is prepared to do something about the economy.”

Dr Cees Bruggemans, chief economist at First National Bank (FNB), says the interest rate relief is expected to let consumer confidence rebound from the low levels to which it sank in May.

“For consumers there’s the psychological aspect of a lower interest rate and also the recent reduction in the petrol price.” Speculation about a possible further reduction will also help to stabilise consumer confidence.

The several billion rand being freed for consumers to spend should not be disdained, he says. “Every bit helps, especially if one takes into account that the ratio of household debt to disposable income is still 74%.”

Liberty Life consumer economist Tendani Mantshimuli says the reduction will support consumer confidence to a degree, but further cuts are necessary.

“Further cuts must follow to stimulate a cycle of spending. I'm just not sure how much room we have to lower the repo rate any further.”

Mantshimuli says a total reduction of two percentage points would bring the repo rate to 3.5% and mean that the real interest rate would be even more negative.

“In theory people would use the lower rates to pay off their debt. But then money would be cheaper, which could encourage people to incur more debt.”

Investec economist Annabel Bishop, a former  Sake24 Economist of the Year, says with current inflation expectations real interest rates are again negative after the interest-rate reduction, but still too little to be able to do much.

“The issue is not whether the real interest rate is negative, but whether the size of the reduction can make a significant difference to the economy.”

Bishop says the reduction will therefore bring only slight relief and have a muted effect on consumer expenditure.

Stanlib economist Kevin Lings does not exclude the possibility of another interest-rate cut later this year.

He reckons the lower interest rate won't really help the economy get moving.
“The interest rate has for some time been very low and there has not been an upswing in investment. Businesses aren't suddenly going to start investing.”

- For more business news in Afrikaans, visit www.sake24.com
homeowners  |  interest rate  |  rate cut



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