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Cut back on spending spree in anticipation of another interest rate increase , writes Isaac Moledi

By unknown | Nov 28, 2006 | COMMENTS [ 0 ]

An interest rates hike of 0,5 percent next month is likely to send shivers down the current spending frenzy of consumers.

An interest rates hike of 0,5 percent next month is likely to send shivers down the current spending frenzy of consumers.

This prediction was made by First National Bank (FNB) at the weekend.

Though it is now apparent that the three interest rates hikes since June this year have had no serious effect on consumer spending, with retailers expecting a bumper Christmas, FNB says it expects certain factors to determine the level of spending in the near future.

These factors include the interest rate decision by the Reserve Bank, the level of consumer debt and the cost of servicing that debt, the slowdown in the price growth of property and the expectation that consumers might have about price increases.

Though retailers and Delloitte's year-end holiday season survey released on Friday expect a booming festive season, FNB does not expect last year's record growth.

Gys Woest, chief financial officer of FNB card, says: "If the governor of the [Reserve Bank] raises interest rates by 0,5 percent in December, it will send a message to consumers that rates might still move up and a large number might then watch their spending levels over the festive season."

But if the repo rate is not changed, Woest says, it could be interpreted that interest rate increases are something of the past. This is likely to accelerate spending since a large portion of consumers would have already adjusted to the current interest rate levels.

"The impact of the level of debt and the cost of servicing that debt would segment the population into those with home loans and motor vehicle loans, and those without these loan types."

Woest says that those people who have home loans as well as motor vehicle loans would have felt the effect of the 1,5 percent prime movement already and quite a number of them are already struggling to adjust their monthly cash flows. This segment would reduce its spending levels quite materially.

Those without these loans would not yet have experienced increases in the cost of servicing their debt since most credit card, store card and other short-term debt instruments have not yet moved interest rates.

The lower end of the market might therefore be more inclined to carry on spending. This would indicate that durable and semi- durable goods sales would go down while consumables and food spending would remain robust.

The slowdown in the growth in property prices would influence the psyche of the consumer materially because they might feel that their wealth is growing less strongly and they will thus reduce their spending.

Woest says: "Interestingly, consumers have been using their property values as giant ATM machines. Unfortunately the cash withdrawals on these machines are slowing down, which indicates a slowdown in spending.

"We would expect overall growth in spending to be lower than last year led by durable and semi-durable goods, but that textile and food spending would still be extremely robust."

Advice from industry experts is to slow down on your spending spree in anticipation of further interest rate increases. Interest rate increases mean higher repayments on all debt, from home loans to credit cards.

Consumers overextending themselves in a rising interest rate environment will always battle to make repayments in the event that interest rates rise further and further.


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