A Case for Near-zero Interest Rates… Or Not

During the Global Debt Crisis (2003 to 2010) countries such as Japan, the United States and several members of the European Union adopted the unconventional policy of zero or near-zero interest rates to encourage capital and household expenditure, investment and economic growth.

As a result of the Coronavirus Global Pandemic, we are experiencing worldwide unprecedented levels of retrenchments, economic contraction, and incredible demand on government financial support. As a result, in September 2020, the Federal Reserve Bank of the United States’ interest rate ranged between 0% and 0.25%. According to the New York Times, the Federal Reserve intends to maintain these low interest rates until 2023, even if there is an economic recovery, rather focusing on keeping the Dollar low to promote exports and the rise in equity markets.

The Cost of Low Interest Rates

  • As the cost of money is low, we could experience an unsustainable rise in debt, which will become difficult to service once interest rates start to increase again. The like of sub-prime lending comes to mind.
  • Investors would prefer to hoard their cash or find more lucrative, albeit riskier, investments than those offered by commercial banks, depleting the banks’ reserves. This is often referred to as a “liquidity trap”, which leads to changes in the price of my money not translating to changes in the CPI index.
  • The idea of near-zero interest rates is to encourage capital expenditure. This is a double-edged sword, as it will inflate the price of assets, such as property, vehicles, machinery, appliances, etc.
  • The hardest hit by the low interest rates are the retirement plans and pension fund schemes. They rely on secure investment vehicles to enable them to pay their pensioners. They cannot afford to gamble on riskier investments at the cost of those depending on their pension income.

The Benefit to Our Property Market

In 2018 the real estate industry, together with the finance and business services sector, contributed 22.39% of GBP, a total of R640 billion, more than manufacturing and mining combined. One cannot ignore the impact of this industry on our economy. Furthermore, it is a good indicator of consumer confidence (both local and foreign) and household income.

The property industry has performed better than expected. Tess Rodrigues, managing director of mortgage originating company, Property Factor, confirms; “Despite the pandemic, we have already achieved 200% on last year’s turnover. I attribute this to the high demand for property driven by the low interest rates. We are also seeing an increase in property prices, especially in the Western Cape. I believe this is a result of supply not keeping pace with demand, brought on by the lockdown restrictions.”

This sentiment is further supported by Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, who says; “For us as a brand, our company has recorded record-breaking sales totals for three consecutive months, starting with R2.4bn in July followed by R3.2bn in August and ending with R2.8bn in September. Our prediction is that the market will continue to perform well for the rest of the year provided that we do not fall into another crisis, and is likely to return to volumes similar to those which we were experiencing pre-lockdown.”

“For the benefit of our home loan clients, we would support the interest rates remaining low or even dropping further,” says Ms Rodrigues. “However, we encourage folk to use this opportunity to reduce their debt. As interest rates are low, the more they pay on their loans or credit facilities, the higher the portion of their repayment goes towards the capital reduction of the loan. Furthermore, they should take advantage of the low interest rates to rectify their credit records and plan for future financial growth.”

Some banks have placed additional restrictions on their home loan credit criteria, fearing an increase in unemployment and a risk to income stability. These institutions may report a decrease in activity in the sector, but this may be more due to their internal policies than market-related demand.

Will Near -zero Rates Work for South Africa

Will the prolonged low interest rates support President Ramaphosa’s Economic Reconstruction and Recovery Plan and make economic and financial sense for our unique situation? Or will it pose a risk of rapid inflation and frenzied use of credit facilities?

Let’s face it, South Africa was already in a recession before the pandemic. Covid–19 just brought the rest of the world to where we were at. However, President Ramaphosa’s prompt response and lockdown policy, one of the strictest in the world, evaded, given our demographics,  one of the possible worst mortality rates in the world, and prevented the economic disasters currently facing other stronger economies. The world took note.

As investors and savers seek new secure investment vehicles, perhaps we will see products such as RSA Retail Savings Bonds, an investment secured by the South African government, offering two saving options, a fixed rate option and an inflation-linked option, gained popularity. Furthermore, investment in commerce, equities, industry and infrastructure may very well promote the President’s commitment of unleashing R60 billion.

It certainly is not a case of “one-size-fits-all”, but with a vigilant monetary policy, trust in the country’s policymakers and leadership, one could certainly see investment in infrastructure development, industrial growth and employment creation, as opposed to the parking of funds in low risk investments, benefiting the South African economy. However, unlike first world economies, given our challenges of inequality, poverty and reliance on credit, South Africa may not be ready for long-term near-zero interest rates, but short-term, it could work wonders.

Tess Rodrigues is the managing director of Property Factor CC. She has been in the property industry for over 19 years, as a mortgage originator, real estate agent and a property investor. She is recognised as an expert in the industry and has been published in several newspapers, periodicals and websites and has appeared on a number of radio and TV shows.


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