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Expect an interest rate hike before the end of the year

Written by: Derrick Spies
Published: Monday, April 2, 2012

Last week the Reserve Bank left the repo rate unchanged at 5.5 percent for the eighth consecutive meeting, but Dr Neal Bruton of RGT Smart believes that the tide is turning and there’s a strong  chance of an interest rate hike before the end of the year.

Speaking at a function at the Nelson Mandela Bay Business Chamber recently, Bruton said the Reserve Bank had indicated growing concerns over rising inflation.

“Inflation is already above the Reserve Bank target of between three and six  percent, and is likely to stay there for some time to come,” he said.

Bruton said increases in the fuel price, exacerbated by current global tensions in the Middle East and Africa, and sanctions on Iran, would further drive inflation, and in so doing, would also increase the chance of a rates hike.

Bruton said an interest rate hike would have a significant impact on consumers who were already overextended. He said household debt had only declined slightly, from 82 percent to 74%, despite the cost of servicing that debt being at a 36 year low.

“Households have simply not addressed their excessively high levels of debt, I believe that when the interest rates go up, there will be a lot of pain in the market,” he said.

Household disposable income was also being negatively affected by increasing costs of electricity, rates and taxes.

“This is further exacerbated by the fact that South Africans, as a whole, do not save,” he said. Bruton said according to Statistics South Africa, South Africans had been spending far more than they earned since 2006.

Bruton’s outlook for the year was a general slowdown in the economy on the back of a global slowdown led by Europe, with GDP growth at around 2.7% and an interest rate increase of around 0.5%.