Some thoughts about the latest interest rate cut

04-05-2005

The Reserve Bank’s ½% point interest rate cut will bring little respite for prospective homeowners, as it is unlikely to make houses more affordable in the light of booming prices — at most it may prolong the boom by, perhaps, six months.

With salary increases having been unable to match the dramatic growth in house prices over the past few years, existing homeowners have had to make adjustments to expenditure and, by implication, savings. Rather than seeing the interest rate cut as an opportunity to extend their debt load, they should see this as a welcome opportunity to reduce their debts a little, says Rode Report’s editor Garth Johnson.

Caution would also be prudent in view of the fact that the global economy has entered a phase of rising interest rates, set in motion by the United States of America. Further interest-rate cuts in South Africa are highly unlikely in this environment, as a narrowing in the difference between local and foreign interest rates might lead to an outflow of hot money, which could depreciate the rand to such an extent that the inflation target is jeopardised. And the Reserve Bank’s priority is fighting inflation rather than stimulating exports — or is it?

As continued growth in the local economy is wholly dependent on a continued inflow of foreign capital, the Reserve Bank would be careful not to allow the interest-rate gap to narrow too far, only to be forced to reverse recent interest cuts in the near future.