'Lower rates will increase debt'
ECONOMISTS have warned that cutting interest rates could result in the economy over-heating and household debt spiralling out of control.
Their views were made ahead of the Monetary Policy Committee (MPC) meeting tomorrow and Thursday.
Econometrix economist Laura Campbell was doubtful that the Reserve Bank would lower interest rates any further this year.
"Any further reduction of interest rates this year is likely to result in the inflation edging upwards," said Campbell. She said it was highly likely that lowering interest rates would encourage South Africans to take up more debt instead of saving the extra cash.
Figures released by the Reserve Bank last week showed that in the second quarter the household debt to income ratio stood at 76.3%.
This means that for every R100 earned, R76.3c goes towards servicing debt.
"There is a tendency in our economy that when interest rates are low, people take up more debt when they should be saving, servicing debt or both," she said.
The Consumer Price Index inflation for July stood at 4.9%. Statistics South Africa is due to release latest data on the CPI inflation tomorrow.
The repo rate, used by the Reserve Bank to lend to commercial banks, is currently sitting on 5%.
The prime lending rate, which banks use to lend to consumers, is hovering at 8.5%.
Eskom chief economist Mandla Maleka predicted that Reserve Bank Governor Gill Marcus will not move the rates.
Maleka said: "If rates are cut, the MPC would be ignoring inflationary pressures stoked by domestic fuel prices, the rise in global food prices and a cluster administered prices (which include energy tariffs).
"In case the MPC cuts the rates to boost demand, it would not help because this has not happened though the rates are at their lowest in more than 30 years."