Mon­e­tary pol­icy at a glance

CityPress - - Business - Van Rens­burg – Dewald

New in­ter­est rate pro­pos­als by the depart­ment of trade and in­dus­try (the dti) will fun­da­men­tally change the way in which the SA Re­serve Bank in­di­rectly sets max­i­mum in­ter­est rates in the en­tire con­sumer credit mar­ket, in­clud­ing home loans, with its all-im­por­tant re­pur­chase (repo) rate.

This is hap­pen­ing just as South Africa en­ters an up­ward cy­cle in in­ter­est rates af­ter the repo rate reached a low point of 5.5%. The dti is in ef­fect plan­ning to make the loom­ing repo rate in­creases less pow­er­ful as a de­ter­mi­nant of in­ter­est rates faced by con­sumers.

It cur­rently works as fol­lows: The max­i­mum le­gal in­ter­est rates in South Africa are set ac­cord­ing to a for­mula based on the repo rate. Ev­ery 1 per­cent­age point hike in the repo rate makes all the le­gal max­i­mum in­ter­est rates in the coun­try rise by 2.2 per­cent­age points.

The dti’s pro­posal is that a 1-point hike in the repo rate makes the le­gal lim­its go up by only 1.7 points.

For the largest debt mar­ket, mort­gages, the pro­posal is more ex­treme: ev­ery 1 point of repo rate in­crease will trans­late into only 1 point in the max­i­mum rate.

This will in ef­fect re­duce credit providers’ abil­ity to pass on the soon-to-rise cost of cap­i­tal to con­sumers pay­ing the high­est rates.

The ef­fect of this on banks and other credit providers can be­come spec­tac­u­lar if the repo rate goes back up to any­thing like the 12% it reached in 2008.

Ac­cord­ing to the Na­tional Credit Reg­u­la­tor’s Le­bo­gang Selibi, the pro­pos­als “are meant to sup­port mon­e­tary pol­icy” and the low­er­ing of the ef­fect of the repo rate on max­i­mum rates has been pro­posed be­fore to make mon­e­tary pol­icy less pro-cycli­cal.

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