Economic indicators for the second quarter show that household finances are under increasing pressure, and this is expected to persist over the remainder of the year and in 2023, suppressing economic growth as the South African Reserve Bank (SARB) quickens its rate hike trajectory, says Investec chief economist Annabel Bishop.
Last week, the Monetary Policy Committee (MPC) decided to increase the repo rate by another 75 basis points (bps) to 5.50% per year. The decision was made on the back of the South African inflation rate surging above the central bank’s target range, noted financial services firm FNB.
The increase of interest rates is a key monetary policy tool used by the South African Reserve Bank (SARB) to manage inflation.
Bishop said that the monetary policy committee’s meeting saw a very hawkish tone as the members focused on the need to quell high and rising inflation, while lowering their GDP forecast for 2023, which is when the bulk of the country’s rate hike cycle will take effect.
“That is, the SARB aims to make financial conditions harder for consumers by raising interest rates in order to suppress demand and so prevent a broader transmission of high inflation (becoming the norm) throughout the economy for the prices of all goods and services.”
Interest rates have climbed 2.00% in the current interest rate cycle, with the small 25bp lifts in November last year and January this year not having a severe impact initially, said Bishop, adding, however, that cumulatively the rate hikes of 2.00% so far and likely another 1.00% will.
“There is a lagged effect between interest rate hikes and the impact on the economy, of two to three quarters, although there can be some very small effect a quarter out, and the overall effects can last out to a year if not further, depending on factors in the economy.”
Household indebtedness is one of these factors, with debt at a notable 65% of disposable income, and consumers having come from a low-interest rate environment, Bishop warned.
The economist said that a quickening of the delivery of interest rate hikes by the SARB, or front loading, is being aimed at rapidly quelling consumption to limit the pass-through of high inflation from energy and food to prices throughout the economy.
July’s Debt Busters South African money-stress tracker report shows 70% of respondents to the survey indicated they were already feeling financial stress, with 94% believing it affected their home life, and 76% that it was so serious that it was affecting their health.
The survey consisted of 14,000 responses, with the majority worried about running out of money before month end, 36% concerned about paying off debt and 27% worrying about rising inflation and living costs. 72% need 30% or more of their income to repay debt.
Rising interest rates mean rising borrowing costs for consumers, decreasing their spending capacity, said Himal Parbhoo, CEO FNB Retail Cash Investments at FNB. “SA companies utilising debt to conduct business are going to incur higher operating costs as a result, and these are typically passed onto the consumer. Meaning a higher cost of goods for SA consumers.”
FNB said that inflation also has a negative impact on consumers.
“The increase in the fuel price is a large contributor to the rising inflation levels. Higher fuel costs mean higher vehicle running costs for consumers, but also means consumer goods increase in price on account of larger logistics expense. As a result of rising inflation and interest rates, SA consumers are ultimately going to pay more for a basket of goods,” said Parbhoo.
“During times of increasing interest rates, short-term debt facilities should be used the least. Credit card and short-term overdrafts are very expensive forms of debt and are typically linked to the variable interest rate. Consumers must be careful not to increase debt levels during times of increasing interest rates and live within their means.
“Long-term debt facilities will have the lowest cost to consumers and if possible, SA consumers should look to eliminate short-term debt with further interest rate increases expected,” said Parbhoo.