Higher rates not so good for savings

2014-07-18 15:57
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Reserve Bank governor Gill Marcus. (AFP, Lionel Bo Reserve Bank governor Gill Marcus. (AFP, Lionel Bonaventure) ~ AFP
Cape Town - The precarious position the South African Reserve Bank (Sarb) finds itself in has forced Governor Gill Marcus to increase the repo rate once again, albeit by a reduced 0.25%, with the resultant knock on effect of prime now increasing to 9.25%, affecting savings and investment plans, a finance expert said.

While this move is no doubt an attempt to curb inflation, economic growth remains a concern with both short and medium term expectations being revised downwards, said NFB’s Matthew Chapman.

“For investors, this is a small step towards positive real interests rates, but it must be stressed that coupled with tax we are still some way off achieving a positive after tax real interest rate.

“Property investors are likely to take a hit with the increased cost of borrowing, whilst those in equity markets will be comforted on one side by measures to address inflation, but scorned on the other with economic growth likely to continue to stagnate.”

The seven-member Monetary Policy Committee voted 6-1 to raise rates, with five members arguing for 25 basis points while one wanted a 0.5% point hike, Marcus said.

Gradual tightening cycle

The committee was concerned about inflation, which breached the top end of the bank's 3-6% target range in April and accelerated to 6.6% in May.

“Although inflation expectations have remained relatively anchored, should inflation persist outside the target band, these expectations risk becoming dislodged,” Marcus said.

“It is clear that the Sarb is in the midst of a gradual tightening cycle,” Capital Economics analyst Shilan Shah said. “But, given the outlook for weak growth, the Sarb will be reluctant to tighten policy too quickly or aggressively.”

The economy contracted in the first quarter of the year, dragged down by a five-month platinum strike that slashed output from the world’s three largest producers of the precious metal.

Another stoppage by more than 200 000 workers affiliated to metals and engineering union Numsa is likely to keep second-quarter growth depressed, although Marcus said she did not see a recession.

The central bank did cut its 2014 GDP growth forecast to 1.7% from the 2.1% seen in May but stressed that monetary policy could not be the sole panacea for the economy.

“In making the decision to hike rates, the Reserve Bank stressed that the policy choice is extremely difficult but that their core mandate is controlling inflation,” Stanlib economist Kevin Lings said.

“The risks of sustained higher inflation are now relatively high.”

- Fin24 and Reuters.

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