Professional services firm PwC says both businesses and individuals should carefully consider whether to fix their interest rates ahead of an expected round of hikes in the coming years.
South African Reserve Bank (SARB) governor Lesetja Kganyago announced on 27 January that the central bank’s Monetary Policy Committee (MPC) decided to lift the repo rate by 25 basis points to 4% (prime rate of 7.50%).
This was in line with what the majority of economists were expecting given the SARB’s clear guidance over the past 12 months that lending rates would trend notably higher in 2022.
Updated guidance from the SARB indicates that policymakers are now looking to lift the repo rate further towards year-end, possibly to as high as 5%. This implies another three or (more likely) four interest rate hikes in 2022.
“After a period of low interest rates, South African companies now face an escalation in lending rates over the next two to three years. The repo rate is expected to return to its pre-pandemic (end-2019) level of 6.50% by the close of 2024,” PwC said.
“The upward trend will be slower – taking at least three years – than the large rate cuts seen in the first half of 2020. We have had many questions about whether, in light of the current expected upward trend, the present is a good time to fix interest rates on e.g. property mortgages and vehicle finance.”
PwC said the key consideration here is whether the premium paid on a fixed lending rate — often two percentage points higher than a floating rate — is justified now.
“Fixing interest rates would essentially bring forward all of the rate hikes currently pencilled in towards the end of 2023. In other words, a new fixed-rate arrangement could immediately lift the effective interest rate by two percentage points instead of this happening gradually over the next two years under a floating arrangement.”
PwC said rising interest rates will have various short-term operational effects, including on interim and annual financial reporting, operational decisions made in response, and longer-term financial reporting.
“Companies will need to make a number of other decisions that will affect financial reporting, key performance metrics and how they communicate with stakeholders.”
Possible impacts include:
- Financing arrangements (including covenants) which may become cumbersome: Do financing arrangements need to be renegotiated?
- Increasing costs of capital projects: How will the increased cost to complete key projects be funded?
- Financial risk management (including foreign exchange risk) and hedging strategies set for a low-interest-rate environment: Are risk management and hedging strategies fit for purpose?