SIMON BROWN: A matter of interest for households

Last Wednesday we had the US Federal Reserve’s federal open market committee (FOMC) rate decision and there was no change. At the start of the year many were suggesting six rate cuts for 2024, beginning in either January or March. Yet here we are in August with no change yet.

The press conference after the rate announcement is always more important and this time was no different. Fed chair Jerome Powell said a “reduction in our policy rate could be on the table as soon as the next meeting in September”.

In short, he’s saying that, all things being equal, they will discuss rate cuts in the meeting on September 18. What he’s going to want to see between now and then, with July and August data being released during that period, is inflation still moving lower and employment edging higher. Together they spell a rate cut and the FOMC will then almost certainly give us a 0.25% cut, with the November and December meetings potentially resulting in two more cuts.

Locally our Reserve Bank monetary policy committee (MPC) meets the day after the FOMC, on September 19, and then again on November 21.

I see no reason it won’t also start cutting rates, with at least a 0.25% cut at each meeting. Local inflation is nicely below the upper band of the 3%-6% target and the MPC expects CPI to be 4.5% by year-end.

This will be the first relief for indebted consumers since the MPC started raising rates in November 2021 in response to the post-pandemic rise in local and global inflation.

Back in 2021 prime was 7%, a level not seen locally since the mid-1960s. Nine rate raises later, in March 2023, prime hit 11.75%, the highest since March 2009 when prime was 13%.

For those with home loans, every 0.25% drop in prime will reduce your bond repayments by about R170 for every R1m of your bond. Not exactly Lotto winnings, but this will take a little pressure off stretched household budgets. Credit card debt and prime-linked vehicle finance should also all come down, so a family with a R2.5m bond and two cars being financed should see an extra R500-odd every month, and then another R500 a month with the November rate cut.

This is good news for consumer stocks, and we’ve seen clothing retailers already responding with decent share price appreciation in 2024 as the market positions itself for improving local consumer conditions.

But we all know the best advice is not to rush out and spend the extra money. Household finances and balance sheets need repairing after a tough couple of years.

Use this extra money to pay down other debt. Try to keep your bond payments the same to reduce the term and overall amount being paid, and check in on your emergency fund, which may have been depleted over the past few years.

It’s been tough being a South African consumer, but there’s now definitely a light — and no, not a train — at the end of the tunnel.