More tough times ahead for indebted consumers as South Africa’s interest rates hikes, says Standard Bank
The South African Reserve Bank’s decision to raise its benchmark interest rate signals tougher times ahead for the already financially-stressed South African consumer.
Reserve Bank Governor, Lesetja Kganyago, announced yesterday that the repo rate would increase by a further 25 basis points as of today, following a previous 25 basis point increase in June, as inflation continues to accelerate towards the upper limit of the central bank’s 3% to 6% target range. That leaves the repurchase rate at 6.25% and the prime lending rate at 9.75%, raising concern that highly indebted South African consumers will struggle to make ends meet given already exceptionally high debt levels.
The repo rate hike also means the interest rate at which commercial banks lend to consumers — the prime lending rate — increases from 9.50% to 9.75%. This will have an effect on the disposable incomes of consumers, especially as the festive season approaches.
Market forces have driven up the cost of living and the consumer’s ability to repay credit. Although budgets have been under pressure, consumers tend to ignore individual increases in cost of living, as a R20 increase on a tank of petrol or 60 cents added to a pack of cigarettes is not going to break the bank. However, the cumulative effect of these increases is significant. What many people are not aware of is that as the consumer cost of living goes up, so do the costs of suppliers. These costs are then passed on to consumers, thus making daily living costs more expensive.
The announcement will also place additional pressure on the automotive sector in general and on the car-buying public in particular. If a consumer has vehicle finance that is on a prime-linked rate, for example, and is paying off R100 000 on car loan over an average term of 72 months, they will now pay an additional R12 per month. They will pay an additional R36 per month on an average loan amount of R300 000 over the same term. Motorists are encouraged to carefully consider the impact and not just on the instalment, but everything when considering buying a new car, including running and servicing costs.
As regards home loans, an estimation on a R600 000 home loan would see the consumer paying about R98 more on average monthly, while those with a R1 million home loan would see their bond repayments rise by R164.
In order to better absorb the rising cost of living, Standard Bank recommends that consumers examine their budgets and try to cut out any inefficiency. A good start would be to try and pay down the most expensive debt first, such as retail accounts and cancelling non-essential services.
The latest interest rate increase is also bad news for Small and Medium Enterprises (SME) as it has direct and indirect effects on their business. Ultimately, the full impact of the changed economic climate will be seen on balance sheets. For the small business owner, it has never been more important to exercise financial control. Operating as though nothing has changed and it is just ‘business as usual’ could be potentially disastrous. Furthermore, their bottom line will be compromised, with costs most likely being passed on to consumers who are also struggling to make ends meet.
The reality is that right now is a time for consumers to begin tightening their belts. The ideal situation would be for the consumer to have manageable debt with significant savings in the bank, as then an increased interest rate would be good news.
This is a good time for consumers to reflect on their finances and make a commitment to get on a path to financial stability. Standard Bank encourages consumers who find that this increase is a burden, to approach their bank before they default on instalments, as their bank could consider alternative payment arrangements, enabling them to better manage their finances so that they are able to make the best decisions their families and themselves.
