Reserve Bank’s interest rate mistake in South Africa

A seasoned economist was warned that the MPC’s decision to hold rates at record highs is misguided and its mistake is using a policy that is designed to target demand-side inflation.
The latest Altron FinTech Household Resilience Index (AFHRI) confirms the negative impact of high interest rates on household debt costs.
The index comprises 20 different indicators, all of which are directly or indirectly related to sources of income or asset values.
The AFHRI is weighted according to the demand side of the short-term lending industry and calculated every quarter. The first quarter of 2014 is the base period, equalling an index value of 100.
All the indicators are expressed in real terms, i.e., after adjustment for inflation.
According to the index, the ratio of household income to debt costs worsened by 8.7% year over year to record highs in the first quarter of 2024.
Households are now having to spend 9.2% of their disposable incomes on servicing debt.
According to economist Roelof Botha, the debt servicing ratio is at a 15-year high.
“This ratio of income to debt cost is simply the interest that you pay on your mortgage bond, credit cards and overdrafts divided by your income,” he said
“This 9.2% equates to the same amount households are spending on schooling, medical services and products, clothing, fruit and vegetables, hot beverages, all household appliances, and books; this also equates to 9.2% according to the CPI household basket,” he added.
This is not good news, especially for the literal millions of South Africans who are battling to make ends meet, with no thanks to the Monetary Policy Committee (MPC).
“It is no surprise that this dramatic increase in the debt servicing costs of households coincided with the decision by the MPC of the Reserve Bank at the end of 2021 to follow a restrictive monetary policy stance”, said Botha.
This has resulted in a relentless increase in the official repo rate, which automatically feeds into the prime overdraft lending rate of the banks.
Botha noted that the big problem with the Reserve Bank’s hawkish stance on interest rates is that there has been no demand inflation in South Africa, and there hasn’t been any in the last four years.
He argued that the MPC’s decisions had little impact on inflation; rather, pricing was driven by external factors.
“Every economist has pointed to external factors as indicators of the inflation peak, as well as the reasons why inflation has dropped – and it’s not because of the MPCs rate hikes, which have only hurt South Africans and business in the country,” he said.
On Thursday (18 July), the MPC decided to hold the repo rate at 8.25% and the prime lending rate at 11.75%.
The decision was in line with market expectations, where most economists anticipated a hold. The prevailing view is that the SARB will not cut interest rates ahead of the US Fed.
While the SARB acknowledged the easing inflationary environment, the bank remained hawkish, warning that the risks to the inflation outlook remain on the upside.
Both argue that there is no merit to these reasons.
The latest inflation data shows that CPI is sitting at 5.1% in South Africa.
“Most economists would agree with me that this is perfectly acceptable for a developing economy on the Southern tip of Africa, which is so far removed from the major consumer markets.
“Even by definition, this rate is acceptable because the Reserve Bank’s own target range is between 3% and 6%,” Botha said.
Botha added that it is quite ridiculous that the SARB will not cut interest rates ahead of the US Fed—
which operates in the biggest economy in the world – an economy with little in common with South Africa.
“It’s quite ridiculous because the USA effectively has full employment – when you consider voluntary unemployment such as students and people on sabbatical – which we do not have, not even remotely,” said Botha.
Botha noted that the USA’s real interest rate – which is the prime rate minus the rate of inflation (CPI) – is close to zero. At the same time, South Africa’s real interest rate is approaching 6%.
He added that, since 2024, the MPC’s actions have resulted in a 110% increase in the cost of capital and credit.
This discourages business development because the cost is too high, which is dangerous for a country like South Africa, which has unacceptably high unemployment and no economic growth, he said.