When interest rates went through the ceiling in 1998 many of us were wishing that we had fixed our bond rates. Trying to predict the direction of interest rates is like trying to stab a pea with a toothpick. Those soothsayers who were quick off the mark pegged their loans at 17,5% during mid 1998 and sat back with a self-righteous smirk as their unfortunate contemporaries endured the rollercoaster ride.

Studies in the USA have shown that, over time, people who where willing to accept a variable rate did better than those on fixed rates. This, however, has occurred in a low inflation economy where interest rates have come down over the past eight years.

We have watched prime mortgage rates drop from 24% in August 98 to 20% in January 99 then 14,5% in January 2000. This obviously benefited variable-rate bond payers.

The questions we need to answer are as follows:

  • Will the declining trend in the production price and consumers price indices lead us to a lower cost of money (interest) over the next twelve months?
  • With inflation "theoretically" around 6,8% and prime mortgage rate at 14,5% we are paying a real interest cost of about 7,7% on our home loan. Therefore, will the twin demands for credit, from the private sector and government, maintain this high real interest cost?

    With this year's continuing Rand decline against the US Dollar and Sterling and the demand for credit still strong and the recent 0,25% up-tick in the Repo rate it looks unlikely that the prime rate will drop any further.

    If we add the facts that government debt remains above at 52% of GDP and private sector savings hover around 1,1% of personal disposable income it's unlikely that our prime rate will drop below 14,5% in the foreseeable future.

    On balance, those homebuyers who rode the variable rate rollercoaster have benefited. When rates are near their historic low, banks will only offer fixed rates above the prevailing variable rate. Currently, the large commercial banks are quoting fixed rates of 16 to 16,5%. Could this be our best indication of where rates are going?

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