Johannesburg - It is important to make significant strides in reducing the household debt-to-disposable income ratio prior to the next interest rate hiking cycle, whenever that may come, according to John Loos, household and property sector strategist at FNB.
He would preferably like to see this ratio at least below 70% by then.
"There have also been ample warning signs that consumer credit health is deteriorating, arguably inappropriate at a time when interest rates are at an 'extreme' cyclical low point or at least close," said Loos.
Next week will produce some crucial data in this regard, he said.
On Tuesday, GDP data will give a hint of what to expect in terms of the household disposable income growth numbers for the second quarter, while Friday will see the SA Reserve Bank (Sarb) give us an indication of whether household sector credit growth showed a further slowing in July.
"Right now there are some key indicators of risk that need to be taken cognisance of so when interest rates finally do go up, South Africans cannot say that we have not been warned," said Loos.
These days he believes in an approach to lending and borrowing that is based far more on what current risk indicators are telling, as opposed to depending on forecasts.
"This in effect means tweaking one’s approach far more often as key risk indicators change and not trying so hard to predict what such indicators are going to do in future," he suggested.
It would appear to him that Sarb is more mindful of near term economic growth issues.
"As a result, many forecasters don’t see this week’s release of the July CPI inflation number - which shot up from a previous rate of 5.5% to 6.3% - as necessarily leading to an interest rate change any time soon, with our economic growth rate looking anaemic at best," said Loos.
"Indeed, our own FNB forecast is for interest rates to move sideways at current levels until 2015."
However, the Sarb does have “tolerance limits”, Loos said, and consumers will have to keep guessing as to what those are.
Sarb has indicated repeated concern regarding “upside risks” to the inflation outlook, with certain home grown drivers of inflation, notably high wage demands in a troubled labour market and the possible inflationary impact of a volatile rand.
"While we continue to guess what the Sarb may do and when, it is important to keep one’s eye on the facts and on figures that tell us about the 'here and now'," said Loos.
"The fact is that, although the Sarb doesn’t foresee a prolonged breach of the upper inflation target, CPI inflation is now above the 6% inflation target limit."
The longer it stays at higher levels, the more possible it becomes that inflation expectations (already at 6% and 6.1% for the next two years according to the BER survey) become a self-fulfilling prophesy.
Sarb also still has an official inflation targeting to pursue.
"This should be enough for us to be utilising what time we have left before the next rate hiking cycle to make sure that the household financial situation is in order," said Loos.
"We often compare consumer debt-servicing performance in a low interest rate environment with that of high interest rate environments, and then draw the conclusion that we are doing well," he said.
"That approach is akin to saying that this summer is a hot one, because it is far hotter than the past winter, as opposed to evaluating it by previous summers’ temperature levels."
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