More ‘punishment’ on the way for households in South Africa

 ·17 Jul 2023

South African households cannot afford another interest rate hike this week, says Samuel Seeff, chairman of the Seeff Property Group. – but they may have to brace for one anyway.

“While we are aware that Reserve Bank Governor, Mr Lesetja Kganyago has signalled that a further 25-basis points hike may be necessary to curb inflation, we urge the Bank to consider holding off and keeping the repo rate unchanged at 8.25%,” he said.

“The burden on consumers, homeowners and buyers is simply too high. On top of electricity and other hikes, they have already had to absorb 475bps in rate hikes and are being ‘punished’ when current inflation is not due to domestic spending, but is largely imported.”

Seeff said that inflation has been coming down and hit an unexpected 13-month low of 6.3% in May 2023 while the Rand-Dollar exchange rate appears to have stabilised.

“In reality, the higher interest rates have done more harm than good,” he said.

Speaking to the property market, Seeff said that high rates have kept households under pressure and property sales muted. Sales volumes – even in the highly sought-after Western Cape markets – have been down, and first-time buyers are struggling to find an in.

“We are undoubtedly in a buyer’s market. Sellers now need to price accurately as buyers are able to dictate prices,” he said.

Trouble on the way

Despite pleading from the property market, economists and analysts are divided on what to expect from the rate hike decision this week.

Some analysts are predicting a pause in interest rate hikes this week, and many others have pencilled in a hike of 25 bps, which would put serious pressure on already overburdened South African households.

The South African Reserve Bank (SARB)’s Monetary Policy Committee (MPC) is scheduled to announce its decision on interest rates on Thursday (20 July), informing South Africans whether they will be forced to pay more for their home, car, and other debt repayments.

According to Bloomberg, analysts are less certain than they were a month ago that South Africa’s central bank would pause its steepest phase of monetary tightening since 2009.

Of the 16 polled in a Bloomberg survey conducted in the first half of July, half predict the central bank’s monetary policy committee will lift the benchmark interest rate by a quarter percentage point to 8.50%, and the rest forecast a hold on the rate hikes. That’s compared with almost two-thirds who expected a pause last month.

The MPC has raised the key rate by 475 basis points since it started tightening in November 2021 to rein in inflation that has been above the 4.5% midpoint of its target range, where it prefers to anchor price-growth expectations, for more than two years.

The June consumer inflation (CPI) and May retail sales figures are scheduled for release on Wednesday (19 July), and Bureau for Economic Research (BER) noted that this data at the SARB’s disposal is likely to show a further notable annual moderation in headline consumer price pressure.

The BER expects the annual rate of increase for headline CPI to moderate to 5.4% in June from 6.3% in May, reverting to within the MPC’s 3% to 6% target range.

However, Economist Bonke Dumisa – in an interview with SABC News – noted that the positive CPI movements and forecasts are a result of externalities outside of the SARB’s control and are a result of the decline in global crude oil prices and the strengthening of the rand.

He added that while CPI is expected to show a decline for June, history has shown the MPC has chosen to hike rates if inflation is still above the SARB’s preferred target midpoint of 4.5%. Therefore, Dumisa forecasts a hike of 25 bps on Thursday.

This forecast is in line with the BER forecast, as it, too, expects a hike of 25 bps – noting that the MPC will be concerned about the inflation expectations for the second quarter of 2023 (which is expected to rise to 6.5%), as well as the current volatile nature of the rand and global crude oil prices.

Bombshell for the middle class

Middle-class South Africans are under immense stress, struggling to make vehicle and home loan repayments while relying on credit cards to make it through the month, and another rate hike will worsen their situation.

The latest Credit Stress Report by consumer analytics and research company Eighty20 for the first quarter of 2023 paints a bleak picture for South Africa’s middle-class and affluent households, with prevailing economic pressures feeding through to even those who could previously bear the worst of it.

The first quarter of the year marks a particularly harrowing data point for middle-class South Africans, where rising debts and lower incomes mean that this segment is now spending 70% of their monthly income to cover debt instalments.

This has led to an increase in overall defaults among middle-class households, with an increase of 21% in debt going newly into default – to a rate of 3.4% of the total.

More worrying is that the stresses are even feeding through to the more affluent market, which experienced an increase of 23% of debts going newly into default – to a rate of 1.7% of the total – and 60% of average monthly income going into paying off credit and loans.

Property experts are particularly concerned with the forecasts of yet another rate hike. Following the two 50 bps hikes in January and March 2023, Homeowners financing a R2 million bond are now paying over R6,000 more than they were less than two years ago.

Expectations have, therefore, stressed that another rate hike would push some homeowners to sell and downsize due to financial pressures.

However, the head of South Africa Economic Research at Standard Bank, Elna Moolman, noted that while part of the inflation experienced in South Africa is due to external factors, The SARB needs to put measures in place to ensure inflation doesn’t run away.

“A bigger problem would be an affordability spiral, where unabated inflation causes food and living costs to consistently rise, causing calls for wage increases which then causes even higher commodity prices by companies that need to foot the bill for wage increases,” she said.

“By hiking rates, this makes it harder for commodity stakeholders to increase prices as demand is put under pressure, and we have seen in the past that this strategy is very effective,” added Moolman.

Read: Interest rates are crushing South African consumers

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