Lack of interest rate cut will see suppressed consumer spending
DURBAN- The upcoming festive season would likely see suppressed consumer spending in South Africa.
Mancosa based economics academic Jithendra Maharaj said the South African Reserve Bank’s (Sarb) decision to keep the bank repo rate unchanged at 6.5% would appear to be in response to Moody’s latest downgrading and an attempt by the Sarb to prevent further decline in the country’s credit rating.
“The repo rate should have rather been decreased so that it would have stimulated consumer spending, especially during the coming festive season,” said Maharaj.
The academic said the decrease might be in the consumption of luxury goods. “If consumers do go for luxury items they will compromise. The purchase of luxury items would continue but consumers are likely to look at substitutes(costing less).”
The repo rate informs the Central Bank in terms of the rate of lending to commercial banks which in turn impact on the rate at which commercial banks lend to their clients. An unchanged rate means that South Africans will not experience any changes in their monthly debt repayments.
Reserve Bank’s Governor Lesetja Kganyago announced that the inflation rate was at the lowest level in eight years at 3.7%.
Maharaj said this augured well for consumers, however, given South Africa’s the increasing unemployment rate of nearly 30% in the country, the lower inflation rate was to be expected. He said it would have better served the economy to have decreased the repo rate which would have impacted positively in terms of South Africans paying less on loans and mortgages which would, in all likelihood, increase consumer spending.
“Increased consumer spending improves and stimulates the economy in both the service and manufacturing sectors and would improve Gross Domestic Product (GDP). The Reserve Bank has indicated that GDP forecast will drop 0.1% to 0.5% and this is in keeping with lower public and private consumption of goods and services,” said Maharaj.
He said the impact on consumers, particularly during the festive season, was that there will be fewer big-ticket items than usual in shopping trolleys. He said spending would remain fairly flat with the man-in-the-street having no incentive to use that credit card or credit financing facility. Maharaj said further monthly repayments on existing debt would remain the same and consumers will probably be ambivalent about personal budgets.
Maharaj said that on the other hand, the consumer would not be fooled into a spending frenzy this December. Had said had the interest rate dropped, it would necessarily would have to increase in the future (due to Government’s weakening fiscal position) making all the repayments on purchases more expensive.
Maharaj warned consumers to budget with care and diligence and spend accordingly.