Interest rate cut by 100 basis points

The Monetary Policy Committee has been meeting this week and has decided to reduce the Prime interest rate by 1% to 12% from 13% and the Repo rate (this is the rate at which commercial banks can borrow from the Reserve Bank) has been reduced to 8.50% from 9.50%. This will have an effect on your bond if you have a Prime related mortgage. Justmoney asked our home loan specialist to work out how much this would save you in payments every month for various bonds all over a 20 year period.

• R750 000 bond = R528.67 savings per month
• R1 000 000 bond = R704.90 in savings per month
• R1 500 000 bond = R1057.34 in savings per month

These savings however will not be automatic and it will depend on your bond provider when they will lower the rates at which they charge you. Some bond providers cut at the same time as the MPC while others wait for a little while before they pass the savings created by the cut onto consumers. You will need to check with your bond provider what the actual interest rate that you are being charged is in light of the interest rate cut today.

The interest rate decision was watched by many and eagerly expected. This is what some of the papers had to say in the run up to the rate decision this afternoon. The Dispatch predicted a 100 point cut. This was based on the predictions of the economists that they interviewed, and they got it right. The article had a look at the background issues that go into formulating the MPC response to the interest rate. The MPC has been pursuing a policy of inflation targeting which has started to bring down the inflation rate. Although it only declined by a small amount in the latest figures it is declining, and the slow rate opens up the possibility of further interest rate cuts.

What do I do when the interest rate gets cut?

The Monetary Policy Committee of the Reserve Bank is meeting this week and will be releasing their interest rate decision to the public at Three pm on Thursday 30th April 2009. There is an expectation that the MPC will cut rates and there has been some speculation that it will be by a significant amount. So what can you do to take advantage of a lower interest rate?

• Remortgage your home at a lower rate
• Compare your credit cards
• Review your bank savings accounts

All of these methods can be used to take advantage of a lower interest rate and help you keep your personal finance in a better position. The expected rate cuts have been looked at by Business Report who noted that the interest rate decision will depend on a number of factors and that it would be heavily influenced by inflation data that Statistics South Africa would be releasing this week. Other data that will influence the decision comes from Reserve Bank data on credit extension while SARS is to release trade data. All of these will have an effect on the decision to cut the interest rates or not. While we may be in for some surprises the general view is that the rates will be cut.

Fin24 also looked at the rate cut possibility and reported that the MPC could surprise us with a 1.5 or even 2 percentage point cut. The article also looked at the various data to come that will influence the decision. They noted that a 'bigger cut may be justified by the faster rate of economic deterioration', and that 'it is hoped that faster rate cuts could help confidence and production to rebound quicker'. So stay on top of your finance and if there is a rate cut make sure you are positioned to take full advantage of it.

Will they cut the Repo?

The election is over. The government is moving on. The global economy is still in a crisis. Our economy is still taking a beating. Will the Reserve Bank change its policies in the face of all this? The answer seems to be no. So what can you do to make sure that you stay in financial shape?

• Plan a budget and stick to it
• Compare interest rates on your savings accounts
• Don't Panic!

iAfrica tells us that Mboweni and Manuel are not seeing eye to eye on what to do about the financial crisis. Manuel has been rather more up beat, now that he has been re-elected this may change. Fin24 however tells us that the South African Reserve Bank intends to continue to implement the policies of the new government but does not expect any major changes to that policy. The policy of inflation targeting has been followed for the last few years. That means that interest rate cuts may be coming.

The Mail and Guardian tells us that the Reserve Bank is expected to continue with the policy of aggressive inflation targeting and that the MPC is likely to meet every month except July this year. This is fuelling expectations that there are further rate cuts ahead of us this year. So while you wait for the economy to improve or your home loan to get cheaper to service you can get some debt consolidation and keep plugging away at that budget to help you pay your way through the rest of the year, but most importantly Don't Panic!

Rate cuts ahoy?

Business confidence is down.

New data released by Statistics SA yesterday showed that the physical volume of manufacturing production was down 15% and that the total value of manufactured products produced was down 9.2%.

These figures reflect what happened all the way back in February already.

The major parts of this decline were from three sectors.

1. Basic iron and steel, non-ferrous metal products, metal products and machinery

2. Motor vehicles, parts and accessories and other transport equipment,and

3. Petroleum, chemical products, rubber and plastic products.

These sectors are some of the most vulnerable South African sectors as they have the most exposure to the global financial crisis relying on export markets and overseas buyers.

Other data released by Stats SA today show that while gold production has increased 2.7% non-gold mining has fallen by 14.9% leading to an overall reduction in mining output by 12.8%.

Again mining is vulnerable to the economic meltdown as we need to sell our minerals to other countries.

Business Report tells us that business confidence fell to a seven year low last month mainly due to falling exports.

Business Report also noted that house prices are falling and that they are expected to continue to fall for the rest of the year and only start to recover in 2010 according to figures released by ABSA's housing price index.

These figures are not promising.

The ANC partly as a response to this and partly no doubt as an electioneering strategy have called for more rate cuts to boost spending.

The Mail and Guardian carried the headline 'Interest rate cuts proposed to boost economy'.

The Treasurer General Mathews Phosa called for a monthly interest rate meeting by the Reserve Bank.

Apparently they are concerned by the possible job losses that will follow these dismal figures and that interest rate cuts can be used to boost the domestic economy offsetting the downturn.

Business Day also carried these comments noting that they were made at the ANC's Progressive Business Forum at Gallagher Estate in Midrand.

The interesting thing is that within the ANC these rate cuts are seen as a leftist strategy while rightist business leaders are also in favour!

The Times noted the problems faced by Pamodzi Gold where workers have not been paid for March and only got 70% of their salaries in February.

All of these factors point to the ANC going into crisis mode and iAfrica also reported on the call for further rate cuts.

The times they are tough and we still have a way to go before the expected boost in 2010 from the Soccer World Cup.

So tighten your belts do some budget planning and register with Justmoney.co.za to keep up to date with what's going on in the economy.

Emergency rate cut?

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Emergency rate cut?

Statistics SA released some scary, well, statistics yesterday.

These are the figures that relate to our GDP. GDP or Gross Domestic Product is the total of all goods and services produced by a country over a specific period.

The period in question is the last quarter of last year, Q4 2008.

The figure has fallen into the negatives. Negative 1.8%.

When an economist talks about 'negative growth' what they really mean is that our economy is contracting, not growing.

This use of the word growth is due to the mindset that without growth we fail.

There are other economic threads of thought that would point to the obvious, that we can't keep growing as the earth is a finite resource.

However non growth economics are anathema to classical schools of economic thought.

This is why the misnomer 'negative growth' kicks in, and with too much emphasis on growth we run the risk of uneconomic growth.

However, the system as it stands is one whereby negative growth is a big bad wolf that has come to eat us all up.

With our GDP contracting by 1.8% at the end of last year we are not in a recession.

For a recession you need to consecutive quarters when the economy contracts. The third quarter of 2008 grew at 0.2% this is pretty close to no growth but technically does not put us in a recession.

The business news outlets all carried comment about the new figures with some even speculating that The Guv, Tito Mboweni, will call an emergency rate cut.

But bear in mind that rate cuts do take some time to filter their effects into the economy itself. A rate cut now is going to have an effect in a few months time, they are not a quick fix and more of a guide for where a central banker wants the economy to go.

Here are some of the comments from the papers.

Fin24 was in the surprise rate cut camp, but also qualified the chance of this happening on the inflation data due in at 11:30 Wednesday 25 February (today).

If inflation has not responded to the previous rate cuts (and the change in how it is worked out) then there may be more weight to the possibility of an emergency rate cut.

iAfrica interviewed a bunch of economists to get their take on the situation, with most figuring on an early rate cut coming.

The Times reckons that we are already in recession and their quoted economist says this is due to the stats for last year needing to be revised, and that there was already a contraction in quarter three.

The thing is, these are notional versions of reality and when the difference is only 0.2% that may be right, but can never be entirely accurate as it is not what it is itself, and merely a model thereof.

According to Bua News if our economy is shown to have contracted in the first quarter of 2009 then we will be in a recession.

Right now there is a lot of uncertainty and the best thing you can do is keep up with your budget planning and keep your savings in a safe place. There is more turmoil to come and it won't be pretty.

Reactions to the rate cut

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Reactions to the rate cut

The interest rate was cut yesterday by 100 basis points or one percent.

This basically means that money is now cheaper to borrow because you don't need to pay back as much Rand for Rand as you did yesterday morning.

Yay!

The effect of this is that you may be able to renegotiate your mortgage, and put money back into your pocket.

This is what the financial news outlets had to say about the rate cut.

The Mail and Guardian came in with the headline ' More interest rate cuts needed'. They were of this opinion because one of their interviewed economists stated that The Guv, Tito Mboweni had half jokingly said that head had suggested a rate cut of 200 basis points but that the Monetary Policy committee had restrained him and gone with the more conservative approach, which is well in line with the tendencies of central bankers.

The article then further predicted rate cuts of another 100 basis points in April. The call was then that interest rates would drop to 12% by June 2009, followed by a possible further two rate cuts of around 50 basis points bring the interest rate down to 11% by October of this year.

The expectation was that after that interest rate cutting would stabilise and that it would be help fairly constant through out 2010. In a further article the Mail and Guardian quoted Uncle Tito on him calling for a 200 basis point cut after he had just returned from Davos, 'They probably thought it was the snow, but I went in there all guns blazing'.

Uncle Tito was also cautionary about a 'tough time ahead' as we weather the global financial storm.

Business Day followed on with the 'all guns blazing' quote and also quoted Mboweni on the tough times ahead that 'any politician who doesn't convey that message to his supporters is living in cloud cuckoo-land'.

They noted that the Rand had weakened on the decision and then firmed up after taking the news with no real worries. There have been major concerns about aggressive rate cutting damaging the value of our currency, but it seems we can take the 100 basis points. They also noted the 'front loading' of the rate cuts with more gentle cuts expected at the end of the year.

Business Report called it a 'decent cut' adding that petrol and food price pressures have lightened.

Justmoney knows it is going to get better it will just take some time. In the meantime get your budget planned and sorted out and if you own a property why not consolidate some of your debts into your mortgage and save money. A mortgage will often be the cheapest form of debt that anyone will take, and it just got a little bit cheaper.

Interest Rates cut by 100 basis points

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Interest rate cut by 100 basis points

The MPC (Monetary Policy Committee) has been meeting today and yesterday.

They announced that the new interest rate has been cut by 100 basis points

This new interest rate will come as welcome news to home owners and those with interest rate linked accounts.

It means that money has just got a bit cheaper to borrow and that it won't cost you as much to pay back any more.

Expectations for the cut varied from 50 basis points to 100 basis points. The major caution that Uncle Tito, The Guv, saw was that there could be a currency risk involved in cutting the interest rate too far too fast.

Business Report had an article stating that the rate cut would not affect the Rand. This was the opinion of interviewed economists from RMB Currency. They were of the opinion that with some many other countries already cutting their rates to zero or nearby, then we wouldn't really feel the difference if even a full 100 basis point cut was decided on. The size of the cut indicates how much the Reserve Bank intends cutting interest rates down to at the end of this cutting cycle. The cut of can be seen as an aggressive cut that signals a plunge to interest rates of around 7% at the end of this cycle.

The rand is not expected to suffer because of this as it is looking very strong at the moment.

iAfrica carried a version of this story, noting that the market has already discounted these expected rate cuts in.

The Times noted that the JSE was edging up in anticipation of the rate cuts this morning the 5th of February. Interest rate stock were apparently showing some signs of buying activity but the rest of the market was quite flat with not a lot of activity going on.

MyRoof.co.za blogged a call for a 100 basis point cut this morning, and were holding their breaths waiting for the decision itself.

The major effect that a cut like this will have on the consumer is in your bond, if you are on a linked rate bond, what you have to pay every month just got less.

Justmoney reckons that you should be able to save money every month by speaking to a home loan specialist who can help you negotiate a better rate.

The other major effect will be on those credit cards that link their interest to the Prime and Repo rates.

Watch this space in the next few days, you might find that what the cheapest credit card in South Africa has changed. However, a small cut doesn't take away the fact that stuff is still expensive, there is a financial crash going on, and a budget can go a long way to helping you through it all.

Inflation falling, rate cuts coming

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Inflation falling, rate cuts coming

Inflation has fallen to 7.7%.

This is the lowest it has ever been with the new basket to work it out.

What this means is that there is a new way to calculate inflation. And the new way shows inflation to be much lower than what it was under the old system of calculating inflation.

Stats SA has published a full breakdown of the new basket used to measure inflation.

The outcome is that now that inflation is measured to be significantly lower, the scene has been set for the Reserve Bank to cut interest rates tomorrow (the 5th of February) and finish the policy of inflation targeting.

The financial news outlets have had a look at this story and this is what they have to say.

Business Day said that because the inflation figure under the new method of measurement was so much lower than expected that this would more than likely lead the Monetary Policy committee to not cut rates by a very large percentage.

There has been some speculation that the MPC would cut rates by more than 100 basis points; however this was now unlikely as inflation was dropping faster and the rate would not have to come down as quick to spur spending in the economy.

However they were of the opinion that the MPC would cut the rate by at least one percent or 100 basis points. There is a minority of analysts who believe that the MPC will only go for a 50 basis points cut, but most were plumping for the full percent.

The Dispatch also looked at the drop in inflation and looked at the various components that have influenced its fall under the new weighting regime. These changes were mainly driven by food and petrol costs.

Fin24 called it in their headline 'Cut by 100 basis points'. they are somewhat cynical about the entire re-weighting process and note that in 2006, which was the year the new pattern of spending was derived from even though 2008 is now considered the base year, there could be a skew in it due to the fact that in 2006 there was still a boom going on and 'it was quite conceivable that people were spending more of their pay on buying cars and less on buying food'.

The article finished with a bold call for the MPC to cut rates by a full 100 basis points.

The outcome of the MPC meeting will be known to Trevor Manuel before he gives his budget speech next week and this could have some last minute influences on his thinking.

iAfrica looked at the possibilities for the budget speech.

Justmoney is going to go with the analysts and expect a rate cut to happen. What this means for you is that you maybe able to renegotiate your homeloan, and you may be better able to consolidate your debt into your mortgage. Make a budget and keep to it and as interest rates fall you will end up with more real money in your pocket at the end of the year.

Inflation fall leads rate cut speculation

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Inflation fall leads rate cut speculation

The have been two measures of inflation released in the last week by Statistics South Africa.

The first one is CPIX or consumer inflation less mortgage costs. The second is the PPI or producer price index.

CPIX measures how much stuff costs for us to buy and PPI measures how much it costs to make that stuff.

Recently the way that CPIX was measured was changed to use a new basket of goods. The way they work it out is to take an 'average shopping basket' of household goods and to measure the price difference from one month to the next, the amount by which prices rise is inflation.

The change to this basket of goods has had a major effect on the inflation rate and inflation now appears to be on a definite downward trajectory.

The figure for CPIX year on year was 10.3% this is the lowest since March of last year when inflation was still in its upward trend.

PPI has fallen as well this time to 11% from 12.6% in November.

In consumer terms a lower inflation rate is a good thing because the price of stuff will rise more slowly. Producers don't like it, because they can't raise their prices as often as they would like to. The answer of the producers is to cut interest rates aggressively with the aim in mind of stimulating spending, fuelling an upswing in the economy.

The news outlets covered both of these sets of data and this is what they had to say.

Business Day came with a headline urging bold cuts to the interest rate. An interviewed economist was of the opinion that the Reserve Bank may front load the expected interest rate cut and come in with a larger cut now in February and then slowly ease in the rest of the expected cuts later on in the year.

There was conjecture that a 100 basis point or one percent cut was possible.

Fin24 looked at the possibilities with the interest rate and extensively quoted the chief economist of Rand Merchant Bank.

He did not believe that the Reserve bank would drop interest rates 'off a cliff' but noted that there would be pressure on them to cut the rates. He was also of the opinion that we are going through an adjustment phase that was caused by too much credit and getting 'greedy'. He reckoned that this would be a painful adjustment but that the excesses of the pre-NCA days needed to be paid for.

BUA News the government info outlet looked at the new data and was calling an interest rate cut of between 50 and 100 basis points.

It looks like the interest rate will come down, but don't get all happy too quickly. These sorts of economic effects can take months to manifest.

Justmoney would rather be socking it away in a savings account and waiting for all the interest rate cuts to happen before buying any hectic big ticket item. The economy is going through a tough patch but will look up again.

The trick is to be prepared to take advantage of it when it does.

How much will inflation fall?

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How much will inflation Fall?

The new inflation data will be released by Statistics SA on Wednesday.

There has been a change to the basket of goods that is used to measure inflation.

The new basket should have the effect of lowering the inflation rate. It has also been redesigned to better separate mortgages out, the list of changes and why can be found on the Statistics SA website.

The Mail and Guardian came in with a speculative piece about how much various economists expected the inflation rate to drop by.

The rate is expected to drop not only because of the changes to the basket used to work it out but also the fact that the upward inflationary spiral that has been a round for some time now, appeared to have turned the trend and to have started heading consistently down, late last year.

The article took a look at the various scenarios that could play out. They based their research on a Reuter's poll that came out last Friday. The poll suggested that of the 19 economists interviewed a consensus on CPIX of 10.4% was reached.

This would be the lowest level that inflation has been at since April 2008.

Some economists saw it dropping further and faster with the possibility of inflation being within the 3%-6% band already by May. It was a policy of inflation targeting that caused all of the interest rate hikes, when inflation was out of that band for so long.

The new headline CPI inflation figure weights food as a lesser portion of the basket now, which should have a major effect as food is a big driver of inflation.

The article then looked at predictions of a rate cut coming and some were even expecting a full 100 basis point cut.

Business Day looked at the rising costs of fruit and veg and how food inflation is soaring. They noted that retail giant Pick n Pay was stepping in and insisting that price cuts be passed on to the consumer.

This sentiment was further followed up in another article by Business Day. The long cycle of interest rate hikes has changed, the markets are suffering and instead of growth in many areas we shall see contraction.

The good news though is that with inflation going down we should see a bit more spending money in our pockets.

It takes time for these effects to be felt in the economy and as in the case of Pick n Pay who understand consumer price sensitivity, they know that the cuts need to be passed down to consumers rather than to a round of profit taking.

However not all retailers will pass on price decreases to your pocket, so until such time as the economy stabilises again, the best thing to do is to hold on tight, keep your budget rolling and set up a savings account as a buffer against anything unexpected happening.

The cut is coming

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The cut is coming

The MPC meets soon, on the fourth and fifth of February.

This is earlier than expected and the date was only changed on the 21st of January.

There has been some speculation about what this means, well apart from the fact that the MPC will be meeting a week earlier than was previously scheduled.

The Dispatch had a great line: 'Economists have laughed off suggestions that the South African Reserve Bank's decision to bring its monetary policy meeting forward suggests the central bank is keen to start cutting interest rates aggressively'.

While the Mail and Guardian came with the headline 'SARB move could mean aggressive cutting'.

Whichever is the correct response, well we will know soon enough. However the M&G headline does not seem to support the view of the economist quoted. The Dispatch's economists were all of the opinion for a 50 basis point cut or half a percent. The M&G also had their economist predicting a 0.5% cut.

The new inflation basket will be coming on stream in February and the new data it will generate will not be ready in time for the February meeting of the MPC.

A larger cut in the interest rate of say around 100 basis points would then, more sensibly, be left to a later meeting of the MPC.

The market is factoring in a total rate cut of around 300 basis points before the end of this particular rate cutting cycle. Too much or too little, too soon or too late can all have major effects on the market and a balanced moderate approach is going to deliver the most stability.

Fin24 looked at this story and their interviewed economists felt that a big rate cut was too risky and that a more moderate cut of around 50 basis points was much more likely.

This more moderate cut seems to be what the economists are expecting but they still hold out the possibility that a 100 point cut might just happen. The economic slowdown might trigger a more aggressive approach from the Reserve Bank and the Guv, Uncle Tito.

iAfrica came in with a very useful story reminding us of what has happened in the past and the effects that rate cuts can have on our currency.

An economist pointed out that comments that say that rate cuts could lift the Rand are dangerous. As he noted economics is a trade off, and cutting the rate make the Rand more vulnerable. The last time we were in a rate cutting cycle, the Rand lost massive amounts of its value and those silly exchange rates that we have just got used to now, never used to be at these levels.

Aggressive rate cutting could further slash the weight of the Rand and crash our currency out.

Those crying for aggressive rate cuts will be defending their interests, but these are not necessarily in the best interests of the South African economy as a whole.

The Times also looked at this story and was of the view that a 50 basis point cut was the most likely.

Justmoney figures on the Guv being true to form and making us listen to his speech before looking up with a little smile and giving us the decision. It looks very likely that the rate will come down, so when and if it does, check out your savings accounts or re-negotiate your homeloan in the light of the new rate.

Rate cuts ahead

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Rate cuts ahead

The scene seems set for rate cuts this year.

BUA News, the government news outlet, brought us a story about how rate cuts can be expected in order to revitalise the mortgage market.

They noted that South African banks were hardly affected by the global sub-prime fiasco and that they were some of the most stable in the world.

This can be attributed to the early introduction of the National Credit Act (NCA) in 2007, which limited the ability of lenders to lend recklessly. This may have lead to a depressed home loan market over the last year, but the long term effect is to have sorted out the market in terms of over indebtedness and we are seeing a correction to price levels that are more in line with what the properties are actually worth rather than what they had been inflated to by those with vested interests in creating an artificial property price bubble. This correction is a good thing and should in theory lead to more people being able to afford their own house as the correct pricing levels settle in.

The interest rate cuts will be able to resuscitate the market once it has fallen to more realistic levels.

BUA News also brings us a story regarding the expected interest rates. They interviewed various economist and research groups and the consensus was for between a two and three percent cut in the interest rate over the course of 2009.

BUA News seems to be happy with these figures and it can be said that they are broadly expecting the same sort of cuts as the economists are predicting.

This is probably a very reliable indicator that the 200 to 300 basis points cuts that are expected are in fact realistic and going to happen. This is good news that the markets will price in accordingly and as their effects take time to manifest, slowly turn the economy around so we are in a great position to attract the sort of expected capital inflows that will come with the World Cup in 2010.

As mentioned before South African banks are in a very strong position and we should not have the same fears as they have in the rest of the world.

The Mail and Guardian came with a story on the crisis in international banking markets. Both Bank of America and Citigroup are facing huge doubts over their abilities to cover their gargantuan losses. The effect of this on SA should be minimal as we have a very limited exposure to their debt problems due to the NCA and exchange controls.

Exchange controls which drew a lot of flack during the so called 'good times' have in fact been extremely useful.

Business Day also looked at this story and the difficulties faced by some of the worlds largest financial institutions.

Justmoney is glad that we don't have these scales of problems and would get itself a savings account in a nice safe South African bank and wait for the corrections and turmoil to pass on by.