South Africans will have to prepare themselves even further as interest rates are expected to reach their highest level in 14 years this month.
Investors have priced in another 50 basis point boost by the South African Reserve Bank (SARB) ahead of the Monetary Policy Committee (MPC) decision on Thursday.
This would be the tenth straight increase since the beginning of 2022, with South Africans seeing the repurchase rate (repo rate) rise from 3.75% in January 2022.
This is because headline consumer inflation is unlikely to fall within the SARB’s target range of 3% to 6% per year in only one month after remaining stuck at 7.1% in March.
Consumer inflation has been above 6% since May 2022, and food inflation hit a 14-year high of 14% in March this year.
According to the most recent Household Affordability Index, the average cost of the household food basket grew by R481.02 (10.6%) year on year, rising from R4 542.93 in April 2022 to R5 023.95 in April 2023.
Angelika Goliger, the chief economist at EY Africa, stated Wednesday that a 50 basis point raise by the MPC was no longer a remote prospect a few weeks ago.
Goliger said, “Two big pieces of news have increased the upside risks for the inflation outlook since the last MPC meeting, namely, the sharp weakening of the rand as a result of the foreign policy spat between South Africa and US.
“And Eskom’s announcement that the country can expect heightened load shedding over the winter. This all adds an upside risk to inflation in the coming months, something the MPC will be wanting to get ahead of through a higher repo rate.”
The rise in interest rates, rolling load shedding, and rising gas and food prices, among other things, have put a burden on South African residents’ discretionary money.
If the MPC raises interest rates by 50 basis points, the SARB’s benchmark lending rate will rise from 7.75% to 8.25%, raising the prime lending rate from 11.25% to 11.75% each year.
This would imply that interest rates have risen to their greatest level since the 2008 global financial crisis, raising debt payments and decreasing discretionary spending.
According to John Manyike, head of financial education at Old Mutual, increased interest rates make borrowing money more expensive, making it more difficult for consumers to acquire credit.
Manyike said that net salary gains were not keeping pace with inflation, implying that people were getting poorer and more indebted.
Manyike said, “For example, a person who bought a house for R1 million over 20 years and paid an R100 000 deposit would have been paying R9 137 a month. With the latest rate increase, this would increase to R9 598 (or an extra R461) a month.
“This is enough to upset an income already balanced on a knife edge. It’s time to take strict personal measures, amid signs of more interest rate hikes.
“The best you can do – especially if you already spend most of your salary repaying debts – is to formulate a budget and try to stop any wastage so you can focus on reducing debt and diversifying your income stream.”
The rand’s purchasing power has also decreased to above R19/$1 due to severe volatility in the currency’s exchange rate as well as a considerably weaker capital market.
There are mounting fears that another hefty repo rate hike could push thousands more South African households into poverty as stagflation bites.
Stagflation is a period of economic hardship marked by slowing economic development, increasing unemployment, and rising prices (inflation).
According to Debt Rescue CEO Niel Roets, the protracted energy crisis will only lead to further declines in living standards and investment, impeding long-term economic growth.
Roets cited the country’s middle-class financial problems, which has resulted in 85 000 domestic employees losing their jobs in private houses.
“While I understand that the MPC likely has no choice but to hike rates again to address inflation, the economic situation is simply not sustainable. Our country is looking at a humanitarian crisis of astronomic proportions.
“The pending rate hike will inevitably increase borrowing costs for consumers and reduce their disposable income even further while pushing levels of debt even higher,” he said.