Interest rate cut brings some relief

Robert Laing

Robert Laing

Reserve Bank governor Tito Mboweni handed households an early Christmas present yesterday by announcing the central bank will drop the rate it lends to commercial banks by 0,5percent from today.

Standard Bank said it would implement this interest rate cut today, but its rivals are only cutting their rates from Monday.

By convention, commercial banks quote the prime rate on which home and other loans are based 3,5percent higher than the Reserve Bank's repo rate.

Yesterday's Monetary Policy Committee (MPC) vote takes the prime rate down to 15percent from 15,5percent.

This translates into a R215 disposable income boost for a family paying off the current median valued home of R580000 over 20 years at prime. They will see their monthly bond repayment drop to R7637 from R7852.

The rate cut was cheered by estate agents, but FNB property strategist John Loos warned it was not likely to be an instant cure for the property market.

"The country still has to get through a period of slow economic growth and job losses, which is expected to partly offset the stimulus of lower interest rates.

"House prices are only expected to show some recovery near to 2010, delayed by the existence of something of an oversupply on the market which could take some time to be mopped up by improving demand. Average house price deflation of about four percent is still expected for 2009 as a whole."

The MPC voted to cut interest rates despite the most recent inflation data reading 12,4percent for October, more than double government's six percent ceiling and 0,9percent higher than the new repo rate. Some economists predicted the MPC would delay its first rate cut until February because of the uncertainty caused by Statistics South Africa switching to a new inflation basket from January.

Mboweni indicated in his statement following the MPC meeting that the committee had decided economic woes outweighed uncertainties over the inflation outlook.

"Household consumption expenditure contracted in the third quarter for the first time since 1998. Consumption of durable goods in particular declined by almost 10percent, while nondurable goods consumption also contracted. Motor vehicle sales continued to decline in October and November, while real retail trade sales declined further in October," he said.