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Send  Share  RSS  Twitter  01 Jun 2009

Finance: Rate Cut Alone Will Not Stimulate Economy: Colliers

 





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"Markets are complex," says Brian Falconer, CEO of JSE-listed Colliers Residential, "so a focus on one aspect of the economy will have a negative impact on another. The focus on inflation targeting has had an effect, but it has over-run its course. The time has come for a different approach, one that is aimed at stimulating the economy, not just on staving off inflation."

The chief problem, says Falconer, is that so-called sticky inflation - 8,4%, well ahead of the 3%-6% target range favoured by the Reserve Bank - has been joined by a shrinking economy, with more bad news to come in line with the global downturn.

"There are many factors which are beyond the control of the Reserve Bank," says Falconer. "They include the recession, which has finally been acknowledged to exist; the sluggish property market; the resurgent oil price; banks' reluctance to advance credit; and ongoing food inflation, which is resistant to attempts to bring it down." The rate cut will at least put money back in the pockets of hard pressed bond-holders, Falconer notes.

On a bond of R1 million, a homeowner will benefit significantly from the latest rate cut:

· A bondholder with a bond of R500 000 will save R344 a month;

· A bondholder with a bond of R1 million will save R689; and

· A bondholder with a bond of R2 million will save R1 378

In total, since the Reserve Bank started cutting interest rates, homeowners have had R3 216,93 returned to them for every R1 million bond held. This is money that can be used for other purposes, to reduce financial pressure at home, or bondholders can reduce the term of their bond by continuing to repay the higher amount. Interest rates are now at their lowest point since June 2006 when the Reserve Bank started fighting inflation by raising the interest rate.

"From a property perspective, the lower interest rates will make it easier for people to enter the market; that coupled with lower prices and reduced stock should start to stimulate the market for both buyers and sellers," says Falconer.

 
 
 
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