The South African Reserve Bank (SARB) has been on a rate hiking spree, with the repo rate rising by 25 basis points in January, marking the eighth consecutive increase since November 2021. The current repo rate stands at 7.25%, with the prime lending rate at 10.75%. The SARB is expected to announce its second interest rate decision this year, and most economists predict another 25 basis points increase, which will take the repo rate to 7.50%.
The SARB’s decision to raise interest rates is to anchor inflation expectations more firmly around the midpoint of the 3% to 6% target band, and to increase confidence in attaining the inflation target sustainably over time. Headline consumer price inflation remains stubbornly high, with the latest reading for February 2023 coming in at 7.0%, driven up by food and non-alcoholic beverages on top of load shedding woes.
Despite the need to tackle inflation, further interest rate hikes will add to the financial difficulties of debt-strapped consumers, as their loan repayments increase, reducing disposable income. Over half of South Africa’s credit-active consumers are over-indebted, according to a financial sector outlook study by the Financial Sector Conduct Authority. The burden of credit card debt is a primary concern, and it’s likely to be worsened by higher interest rates.Economists are divided on whether this will be the last rate hike in the current cycle.
While most economists predict a 25 basis points increase in March, the findings show a split opinion on whether this will be the rate peak. At least 55% of panellists expected March to be the peak of this rate cycle, while 23% think the rate will peak in May, and an additional 18% expect the peak to hit later this year or early next year.The rising interest rates spell additional financial difficulty for debt-strapped consumers.
While interest rate increases might benefit investors, it has a dire impact on many South African households. Credit card debt is a primary burden and a cause for concern in a country laden with debt. Small increments in interest rates should suffice, and the SARB needs to act with caution to avoid overburdening consumers.
In conclusion, the SARB’s decision to raise interest rates is a balancing act between curbing inflation and not causing too much hardship for consumers. The burden of debt and the rising cost of borrowing are primary concerns for many South Africans, and the SARB needs to act with caution to avoid overburdening them. The SARB’s decision this week will be closely watched, and any further rate hikes should be gradual and measured to avoid unnecessary hardship for consumers.
