Interest rate decision on webcast

The Monetary Policy Committee of the Reserve Bank has been meeting Wednesday the 12th of August and today the Thursday the 13th. Including this one there are only three more meetings of the MPC before Tito Mboweni moves on. As always there is speculation regarding what the decision of the MPC will be. Most commentators seem to expect no cut, although there have been some rather loud calls for cuts and large ones at that. The decision will be live on webcast at 3 pm. So what are the chances?

• Most economists say no cut
• Twittersphere says no
• Mboweni may want a swan song

So although the prospects don't seem very good and even though major decisions like this should be based on hard facts often sentiments seeps into the decision, after all the invisible hand is often the sentiment and emotion of the market rather than some abstract mechanism. It is the feeling and intuitions of actual people in the market which sways their economic decisions. The data may be looking slightly better on the inflation front, but other figures show that the economy is still in decline so there are arguments both for and against a cut.

Tito Mboweni is on his way out and may want to get a bit of feelgood back from the market before he goes. Then again he is on record as saying the Governor of the Reserve bank is not a position to be based on popularity. However his past form shows that he does like to spring the odd surprise. Justmoney asked the Twittersphere what they thought and most said no change, and that The Guv will wait for the effects of previous cuts to filter through. There was even one call for an increase given that there may be further turmoil to come in international markets which could still wash over us here. Watch it live on webcast at 3 pm.

What price inflation?

The Reserve Bank's Monetary Policy Committee did not cut interest rates last Thursday the 25th of June 2009. They were widely expected to cut rates beforehand. They have been cutting rates aggressively since December 2008 in order to stimulate the economy. The reason rates were so high was due to the high inflation environment that we were in and the policy of inflation targeting to deal with it. Inflation has not come down quite enough yet and the heavy hand of interest rate manipulation is still weighing in. Interest rates and inflation have a number of implications for your personal finances including:

• Your homeloan
• Your shopping basket
• Your savings account

Homeloans are linked to the Prime rate which is the rate at which the Reserve Bank lends to the commercial banks at plus 3.5%. The Prime rate is generally the benchmark for your homeloan. The 3.5% gap is a convention that the commercial lenders use, but you will often be able to negotiate a Prime minus homeloan. Contact a homeloan specialist to re-negotiate your rate. Even a small rate cut can make a major difference on how much you have to pay. Your shopping basket is massively affected by inflation and food prices are a major cause of inflation. Food production takes a long time and farmers are still paying off last year's high prices this year which leads to higher food prices in the shops right now.

Your savings accounts are affected by the interest rate and as the Reserve Bank cuts rates the commercial banks will pay you less on your savings account. The whole issue of interest rates and inflation targeting is a thorny one and many folk have entered the fray from all sides of the political spectrum. There is a general disappointment at the recent lack of a rate cut, but inflation is also going to be impacted by the Eskom price hike and a slow and steady approach is probably more prudent than feel good quick cuts. Interest rate cuts are not magic bullets and they take a long time to manifest in the economy. The rate cut cycle that started at the end of last year is only really starting to show its effect now. So hang in there, things will get better.

Interest rate cut by one percent

The South African Reserve Banks Monetary Policy Committee (MPC) has been meeting Wednesday 27th and Thursday 28th of May 2009. The MPC determines the interest rate at which the Reserve Bank lends to the commercial banks. They have reduced the rate by 100 basis points. There has been a bunch of bad economic data recently, with inflation not falling and the economy entering a recession there have been calls to cut the rate. The major effect of a rate cut will be felt in your home loan and this is it will save you on a 20 year bond

• R500 000 home loan = R 344.49 a month in savings
• R750 000 home loan = R 516.74 a month in savings
• R1 000 000 home loan = R 688.98 a month in savings

There have been calls in the financial press for cuts of between 50 basis points and 150. The rate itself was cut by 100 basis points, or one percent, in the end. The general prediction was for 100 basis points or 1%. The analysts got it right! The Reserve Bank has been pursuing a policy of inflation targeting and while consumer inflation was steady at 8.4% Producer inflation was down by 2.9% April 2008 to April 2009. So it's not as bad as it could be. The Reserve Bank has so far followed a calm and prudent policy without too many shocks and this policy has sensibly been continued today.

The Reserve Bank may now end its policy of inflation targeting, but a massive cut in interest rates can lead to our currency getting devalued by speculators. Also it seems that credit extension is still growing which means that the rate cuts that have already happened are starting to take effect and that the banks are still increasing lending even if it is not at the levels seen in December 2008. Inflation is expected to hit its target band of 3% - 6% towards the end of this year and the beginning of 2010 but there have been some calls to change the target band upwards by one percent making a more realistic target that we are more likely to be able to hit.

Inflation stays stable at 8.4%

Statistics SA released the Consumer Price Index or the Inflation figures for April 2009 today May 27th 2009. These figures show that inflation has dropped by 0.1% to 8.4%. Average prices increased by 0.5%. This is not totally unexpected and can be seen as the long tail of inflation targeting that has been pursued by the Reserve Bank. Interest rate cuts have an effect on inflation but this effect takes time to manifest and the MPC will be announcing the new interest rates on Thursday 28th of May 2009. GDP is down and this will spur the government to try to kick start the economy. So what has gotten cheaper or not?

• Food and non-alcoholic drinks increased 0.5%
• Bread and cereal decreased by 0.3%
• Petrol increased by 4.9%

The inflation figures when you pick them apart show that the sectors that are getting more expensive most quickly include the petrol price, increasing by 4.9% and hot beverages at 4.7%. These kinds of sectors don't respond as quickly to rate cuts, as there are more inputs to go through before the effect is felt. The Monetary Policy Committee has already cut interest rates by 350 basis points or 3.5% since December 2008 and these cuts are starting to manifest in the economy now, although it seems that with such a small change that the major effects of inflation targeted rate cuts have reached the end of their usefulness.

In order to deal with the economy at the moment using a budget planner is key. Stubborn sectors such as food and transport are still not in parity with the inflation rate and you should budget more for food than before rather than less as you would expect if prices are going up more slowly. These savings are not being passed onto the consumer and we have all got less spending money than previously. So this means we have to be ultra careful with our money if we are to survive the rest of the year before the expected turnaround sets in.

Last round of rate cuts?

The Monetary Policy Committee of the Reserve Bank will be meeting this week on the 27th and 28th of May 2009. The MPC has been consistently cutting interest rates as part of its policy of inflation targeting. There is wide speculation that the MPC will cut rates again this week to the tune of 100 basis points or one percent. This would take the Repo rate down to 7.5 and the Prime rate to 11 percent. Will this save you anything on your homeloan? We looked at what you could save, per month, if a cut or 50, 75, or 100 basis points would have on your million Rand mortgage over 20 years.

• A 50 basis point cut will save you R 346.56
  
• A 75 basis point cut will save you R 518.3
  
• A 100 basis point cut will save you R 688.98

At the moment the commercial banks all charge 3.5% on top of the Repo rate (this is the rate at which the Reserve Bank sells currency to the commercial banks) and there has been some controversy about this spread so the Guv, Tito Mboweni, met with the banks on Thursday 21st May to talk with them about it. The upshot is that the Reserve Bank has established a technical sub-committee to look into the matter and to report back ASAP. 'The sub-committee is convened by Mr Cas Coovadia (Banking Association South Africa) and Dr Roelf du Plooy (South African Reserve Bank)'.

If this spread was to change then you could expect to pay different amounts on your homeloan than those listed here. The 3.5% gap has created a lot of controversy, with some analysts saying it is too much while others say that it is too little. The point is that the lower an interest rate you can get on your mortgage the cheaper it will be for you to pay off. The banks are commercial organisations and have their own responsibilities, but if a more consumer centric approach to setting the gap between Repo and Prime emerges that would be best for you.

Responses to the Rate cut

The Reserve bank cut the interest rate by 100 basis points or one percent last week. This was a not unexpected amount although it did not go far enough, fast enough for some commentators. The fact is a slower approach will make us less open to turbulence in the international market which is undergoing severe stress at the moment. The interest rate cut will affect your home loan, your car finance and any interest rate linked savings accounts you may have.

• Home Loans get cheaper
• Car finance gets cheaper, but
• Interest rate linked savings accounts pay less

The financial papers had a look at the interest rate cut and as the Business Report put it 'Nobody feels enough is being done'. these kind of sentiments are all well and good but as the market is in general ruled by fear and greed these can be seen as the motivators to cut further and faster. These calls are also politically motivated and stem from Cosatu general secretary Zwelinzima Vavi, and Cope MP Phillip Dexter. Business Report also carried an article which stated that the DA were concerned that the Repo and inflation rates were too close together which gave the Reserve Bank little scope for manoeuvre.

Fin24 looked at the story from the angle of the building sector and warned that the rate cut was not going to lift the building sector any time soon as lead times from when an interest rat cut are enacted to when it actually manifests itself in the activities of the real economy are long, on the scale of around six months. With the interest rate expected to be cut further the upswing is only expected towards the end of the year. there was however a feeling that the markets were no longer reacting so vociferously to bad news which may mean that the worst is already behind us.