Next week is set to bring another interest rate hike making it harder for everyday South Africans to make ends meet as monthly repayments would increase in line with the rate hike.
Various analysts and researchers are pointing to another increase, making it the tenth consecutive hike to the rate cycle, which began in November 2021.
The next hike is expected to be announced by the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) on the 25th of May.
In its latest Weekly Review, the Bureau for Economic Research (BER) said that it still suspects the SARB to hike the repo rate by 25bps next week; however, a surprise 50 basis point hike can not be ruled out, especially if the rand does not strengthen meaningfully.
The rand took a toll late last week following accusations by the US ambassador in South Africa that South Africa sold arms to Russia – crushing investor sentiment and bringing the rand to its lowest point in history.
Since then, the currency has still not recovered and remains bogged down by load shedding and a poor reputation.
In March, the MPC surprised the market when it hiked the rate by 50 basis points, increasing the repo rate to 7.75% and the prime lending rate to a 14-year high of 11.25%.
This had severe knock-on effects on cash-strapped South Africans, who were forced to pay more on monthly instalments such as bonds and vehicle asset financing every month.
Another hike will likely add more financial pressure to these households.
Benay Sager, the head of DebtBusters, said that credit has become far more burdensome for many consumers as interest rates rise.
Sager said, for example, taking into account the most recent rate hike, the average bond rates increased from 8.3% to 11.4% per annum in a short space of time. Average vehicle finance rates rose from 12% to 14.8% during the same period.
“If you have an R1 million bond and owe R200,000 in vehicle finance, you are expected to pay nearly R5,000 more per month,” he said.
Increases like such push consumers to tap into more personal loans.
According to the Debt counselling company, 96% of people who applied for debt counselling had a personal loan, indicating that consumers supplement their income with unsecured credit and personal loans.
Momentum’s head of product solutions, Pieter Albertyn, adds that interest rate hikes increase the cost of borrowing considerably, reducing ordinary working South Africans’ ability to save over the long term.
Consumer analytics and research company Eighty20 reported that the average middle-class South African now spends roughly two-thirds of their salary paying off their debts.
Regarding interest rate hikes, Albertyn said they only make things worse for many households and are in for a ‘bad run’ if this continues.
Additionally, Albertyn says the high cost of living poses an imminent threat to retirement savings.
He said a higher cost of living would likely lead individuals to lose focus on long-term investments and savings or even wholly withdraw from their retirement savings without considering the consequences.
The graph below, provided by DailyInvestor, shows just how much the interest rate has changed in South Africa over the past decade:
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