Impact of interest rate cut on retailers

Posted On Wednesday, 20 June 2001 03:01 Published by
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SA retailers are waiting anxiously for the effects of last weeks one percentage point interest rate cut by the Reserve Bank to flow to shopping baskets.

Impact of interest rate cut on retailers. BD 20 June 2001

By Giulietta Talevi

SA retailers are waiting anxiously for the effects of last weeks one percentage point interest rate cut by the Reserve Bank to flow to shopping baskets.

They may have to be more than a little patient.

Analysts say that, historically, consumer stocks do not outperform when there is an interest rate cut. This is in spite of a recent improvement in sentiment in the sector.

The price of the shares of JD Group and Tradehold rose significantly on Friday, before retracing earlier this week.

Douw Steenekamp, a retail analyst at Old Mutual Asset Managers, said it was unclear whether there would be a clear correlation between the rate cut and improvement in retail stocks.

Another analyst said there was no particular reason why Tradehold and JD Group had run up.

He said Tradeholds increased share price had nothing to do with the rate cut. It rose to R2,80 on Friday, but has since dropped to R2,58. JD Groups share price jumped 4,7% on Friday to close 205c higher at R42, but has since lost Fridays gains.

But highly geared consumers might experience some relief. The cut would most benefit people who had a high level of personal debt such as mortgages and car repayments, said the analyst. Hence rate cuts will benefit the higher end of the market.

To retailers like Pep and Shoprite, the benefits of an interestrate cut would thus be negligible.

Another analyst expressed concern that the Banks cut would prompt a further drop in usury rates - the rate at which consumers pay off interest on their clothing accounts for example. When interest rates drop, usury rates generally follow suit, although they might lag by up to 15 months.

The usury rate is currently set at between 22% and 25%, depending on the amount of debt. It is set out in the Hire Purchase Agreement Act, which regulates the rate at which companies charge interest.

If the usury rate were to fall, the margin between stores borrowing and lending would be squeezed.

'If anything, the interest rate cut has a negative effect on these retailers,' an analyst said. 'A lot of the bad results (retailers have posted) are as a result of the reduction in the usury rate. A drop in usury rates is often passed on to the consumer. '

Furniture companies, to get around lower rates, often draw up loan agreements, charging interest of up to 50%.

'If usury rates drop, furniture retailers might switch more customers to loan agreements,' said Evan Walker, retail analyst at Standard Equities.

He said that credit servicing was expensive to manage and that if usury rates were to drop much further, companies might find themselves in a position where they were no longer able to offer credit. A drop in usury rates could get quite punitive for the retailer, said Walker.

He expected usury rates to come under pressure only if interest rates were reduced by another 1% over the next 12 months.

Given the Reserve Banks inflation target, however, this is unlikely to happen.

Walker said that the interest rate cut would not be a huge saving for consumers.

However, the benefit of the cut would be its positive effect on consumer confidence. The retail index has recovered over the past few weeks, though it is about half its January 2000 level.

Publisher: Business Day
Source: Giulietta Talevi

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