21 May 2015

Although inflation is currently on the rise and economic growth is under pressure, the Monetary Policy Committee has decided to leave the interest rates untouched for the time being. The prime lending rate will remain at 9.25%, while the repo rate remains at 5.75%. Current economic factors, such as the rising inflationary pressure, must have made the decision a tough one, with any of the three possible policy options a prospect. However, keeping the rates unchanged for a while longer seemed the most practical at this stage and is welcome news for consumers, even if only for the next two months. While a cut in the rate would temporarily boost the economy and relieve some of the financial burden that many consumers and households are currently carrying, the move would weaken the rand. A weakened rand would only increase inflationary pressure, pushing the rate of inflation outside of the target zone, which would in turn force the Reserve Bank to increase the rates to counteract this. Conversely, a hike in the rates would result in a strengthened rand but would also hurt consumers and damage economic growth further. Although the Reserve Bank does not want to constrain consumer spending, they also don?t want to keep inflation pressure from exceeding the projected goals and targets. Rate increases will have the desired impact on inflation, but will place a lot of strain on consumers. Many consumers are already dealing with high debt levels and the increasing cost of living. Things such as impending electricity price hikes will affect the majority of consumer?s lives and most likely impact on their ability to afford non-essential items. Any further financial constraints will have homeowners stay in the homes they are currently in or downgrade to smaller, more affordable homes where possible. Economists predict that the global interest rate trajectory will remain flatter for longer, which will probably keep the rates where they are until a hike is seen in the US, which is expected to happen around the middle of this year. The Reserve Bank will likely follow suit, so consumers should expect a hike before the year is over. Those who can afford to do so should take advantage of the interest rate stability we have experienced and pay down debt to prepare for future hikes.

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