Even though the expectation persists that SA's prime interest rates won't easily move into single digits, this scenario cannot be discounted.

If the world economy sinks into a recession, prime interest rates could indeed fall to a single digit figure, which poses certain threats.

Interest rates haven't been in single digit terrain since the period between March 1965 and June 1974, when it ranged between 7% and 9,7%.

John Loos, property analyst at FNB's home loans division, expects a series of interest rate cuts in 2009 which would bring rates down to low double digits.

The Reserve Bank's monetary policy committee's (MPC) recent lowering of the repo rate by 0,5% brought the prime rate down to 15%. Loos expects the prime rate to decrease to 12% by the end of 2009.

He says lower interest rates are good short-term stimulus for economic growth, but there's a point where it could start becoming harmful. This doesn't only hinge on the interest rate level, but also depends on how long they remain low.

"If they stay low for too long, the risk might arise that the household debt level and also debt service costs skyrocket."

The current American situation is a good example of this. Seriously low interest rates probably played a large role until middle 2004 to encourage so-called reckless lending practices to unacceptable levels.

He says it can degenerate into a crisis when interest rates increase later on. "The risk of such a crisis increases when interest rates drop to abnormally low levels due to an abnormally weak world situation, because this could lead to big rises in interest rates at a later stage, while the economy has meanwhile become more sensitive to interest rate increases due to high debt levels."

He says it is always difficult to determine what an acceptable interest rate level actually is, but believes that if SA reaches a situation where prime rates become single digits, it could be dangerous depending on how long rates stay low.

Interest rate-sensitive components of the economy, such as the property market, are especially vulnerable during periods when low interest rates prevail.

House price growth then runs the risk of becoming a price bubble which, if it bursts, could cause an American-style financial crisis.

SA is, as far as the global economic crisis is concerned, in the favourable position whereby its higher interest rates is giving it a "financial cushion" against difficult times in the form of interest rate cuts. – Elma Kloppers, Sake24

06/01/2009