Interest rate hike hits imports and exports

WITH THE monetary policy committee (MPC) of the SA Reserve Bank (SARB) upping the interest rates by 50 basis points on October 11, the repo rate went up to 10.5% and prime to 14%. This was the third hike of the year and will hit the freight and trade sectors along with all the other industries in SA. It’s going to push up the price of money, and have a ripple effect throughout the whole freight industry, said Gavin Cooper, MD of Cape Town forwarding company Seair Freight. It’s a big change from the happy days of 2005/06, he added, when the prime rate was pinned at 10.5%. It’s now over 33% higher, going from the 10.5% set in April 2005, to 11% in June 06; 11.5% in August 06; 12% in October 06; 12.5% in December 06; 13% in June 07; 13.5% in August 07; and to 14% this month. It’s going to hit the trade sector where a lot of business is done with borrowed money. “And,” said Cooper, “even though most forwarding companies will recover any increased costs by adding them to the disbursement account, it will just push up the cost of money in general.” And the impact of that, added to the tighter credit terms of the National Credit Act, is likely to put the brakes on imports. Said Cooper: “When the cost of money starts to get tight, a lot of consumers will be dissuaded from buying imported goods, or look for cheaper local alternatives.” Standard Bank economist, Dr Johan Botha, meantime, sees the main indirect impact on SA trade being in the export field. Two reasons for that, he added. The cost increase for companies using borrowed money will again make exports more expensive. “Also, when you have an increase in rates,” said Botha, “the local currency most often appreciates. The stronger rand will be good news for combating inflation, but not such good news for exporting companies. This strengthening of the rand – combined with a weakening US dollar – makes SA exports less competitive in the global market.”