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.

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.