Interest rates kicking South Africans while they’re down

 ·30 Apr 2024

South African households are under significant pressure from persistently high interest rates and are being forced to turn to their credit cards to make ends meet as the banks close the taps on lending.

Nedbank’s latest Money Supply and Credit report for March 2024 shows that general credit growth in South Africa beat expectations as general lending to companies has bounced back.

However, channels to individuals and households have gone the opposite way, with the household market weakening further, hurt by strained personal finances.

The kick is coming from sticky inflation, high interest rates, and a poor labour market, Nedbank said.

At the same time, commercial banks have tightened lending standards in response to rising arrears and defaults on debt repayments, which is also restricting access to finance.

All of South Africa’s major banks have flagged growing credit impairments over the last year due to households struggling to pay back their loans.

Higher interest rates and inflation have hurt local banks by increasing bad debt and making it more difficult for South Africans to repay their loans.

This led many banks to note that they would remain wary of accelerating credit extensions given the strains on household finances.

As a result, households cannot access new loans and have turned to transactional credit to get by.

The weaker household lending has shown through in home loans, vehicle finance and personal loans, Nedbank said.

Growth in home loans eased to 3.0% from 3.3%, while vehicle finance slowed significantly to 6.9% from 8.2%. Personal loans decelerated to a weak 0.2% after slowing to 1.1% in February from 4.2% at the end of last year.

“Demand for transactional credit remained robust, suggesting households relied on credit cards and overdrafts to make ends meet and smooth consumption. Credit cards grew by a faster 10.4% in March, up from an already strong 9.6% in February,” it said.

Interest rate hopes

Nedbank said that the outlook for credit growth remains subdued, and it only expects a change once interest rates start to ease.

“Household credit demand will likely weaken further, only turning the corner around the final quarter of the year,” it said.

While real incomes will recover as inflation recedes, the banking group said the pressure from high interest rates will likely persist for longer amid sticky global and domestic price pressures.

“At this stage, we still expect the first rate cut of 25 bps to arrive in September, followed by another 25 bps in November. This implies that households will only receive some albeit modest relief towards year-end,” it said.

Nedbank is currently one of the more optimistic forecasters for interest rate cuts, with a few analysts and economists coming around to the possibility of zero cuts in 2024.

While currently not a likely move for the South African Reserve Bank (SARB), the possibility of an interest rate hike for the country can’t be discounted, either, as the ‘higher for longer’ narrative grips global markets.

Read: Interest rate hike warning for South Africa

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