Rate cut may be too little too late: experts

ECONOMISTS have overwhelmingly warned that a one per cent cut in South Africa’s interest rates was not an invitation to spend.

Widespread and varied reaction to the cut suggested that Reserve Bank governor Tito Mbonweni’s announcement at the weekend that the Monetary Policy Committee had decided to drop the repo rate by 100 basis points with effect from yesterday, may be ‘too little too late’.The feeling was it may have no significant impact on millions of South Africans who are burdened by massive debt.The cut, like those before it, would take time to filter through to people, and homes and car sales would not respond immediately, Efficient Group chief economist Dawie Roodt warned.’Do not expect miracles. I do not think the car industry, like the property market will benefit much. I am also not sure that the cut was the right thing to do. People are in financial trouble because of credit, and I am a little concerned they may be sucked into taking credit again,’ he said.One of the country’s largest debt counsellors, DebtBusters, agreed, and trade union giant Cosatu warned the cut would do little to help people who are over-burdened by debt.’The interest rate cut is a movement in the right direction, but at least 80 per cent of our clients will not see any tangible impact from this. They would still be over-indebted if interest rates halved from their current levels,’ said DebtBusters MD Luke Hirst.’South Africans spend up to 75 per cent of their monthly income servicing their debt, so an interest rate cut of one percentage point is doing very little to help the seriously indebted.’Cosatu said Mboweni had missed a good chance to cut the repo rate by at least 200 basis points, easing pressure on struggling businesses that were considering retrenchment.’The Monetary Policy Committee has still not grasped the seriousness of the world economic crisis and the impact that is now being felt in South Africa,’ Cosatu said.Unless the Reserve Bank changed its policy, it could push South Africa into a disastrous economic recession, with thousands more losing jobs and millions more doomed to poverty and despair, the union warned.The banking sector has, meanwhile, pinned its hopes on people being able to improve their financial situation thanks to a cut in the interest rate.’Where possible, customers with mortgages should maintain their payments at pre-cut levels, as this will significantly lower the overall cost of the mortgage,’ said FNB chief executive Michael Jordaan.Concerns have been raised by DA spokesman on finance Kobus Marais that the repo and inflation rates were too close together, leaving little room for more rate cuts.’With the repo rate at 8,5 per cent and average inflation expectations at 8,3 per cent, our expected real interest rate is at 0,2 percent. There is a possibility the threats of low or negative growth and high inflation could collide into a cycle of stagflation,’ Marais said.-Business Report