Repo rate hiked by 50 bp to 6.75%

The repurchase rate (repo rate) has been increased by 50 basis points (0.5%), bringing it to 6.75% per annum effective from 29 January 2016.

In the lead up to the repo rate announcement by Lesetja Kganyago, governor of the South African Reserve Bank (SARB), many economists were speculating that a 50 basis point (0.5%) hike was on the table.

Adrian Goslett, CEO of RE/MAX of Southern Africa, stated: “As most economists had predicted, the Reverse Bank has announced another rate hike at today’s Monetary Policy Committee (MPC) meeting, bringing the benchmark repo rate up to 6.75% and the prime lending to 10.25%. The decision was largely brought about to counter the effects of the depreciation of the rand, along with increased inflationary pressure.”

Kganyago, noted: “The MPC still views the stance of monetary policy to be accommodative. Despite the rate increase, the real repurchase rate remains low given the higher expected inflation over the period. The MPC will remain focused on its core mandate of containing inflation within a flexible inflation targeting framework. As noted on a number of occasions in the past, the MPC is of the view that the growth constraints facing the economy are primarily of a structural nature and cannot be solved solely by monetary policy. Nevertheless, the MPC remains sensitive, to the extent possible, to the possible negative impact of monetary policy actions on cyclical growth. As before, future moves will be highly data dependent.”

In light of the announcement by the SARB to increase the repo rate, Jacques Du Toit, Absa senior economist, noted that “commercial banks are expected to raise their prime lending and variable mortgage interest rates by the same magnitude to 10.25% per annum.”

The increase
Du Toit stated: “The MPC’s decision to increase the repo rate this time by a larger margin after announcing a 25 basis points rate hike in November, was taken against the background of serious concerns regarding factors such as the sharply weaker rand exchange since late last year, expected rising food prices in the near term due to the negative impact of the severe drought on agricultural production and the possibility of above-inflation electricity price hikes this year. These and other factors will create further inflationary pressures, with the forecast for the headline inflation rate to average above the level of 6% in 2016. 

“As a result, interest rates are projected to rise further during the course of the year, which will lead to higher debt repayments over a wide front and contributing to increased financial pressure on consumers. In view of these developments and expectations, banks will continue to closely monitor economic and consumer-related trends that may impact their risk appetite and lending criteria,” added Du Toit.

Dr Andrew Golding, CE of the Pam Golding Property group, stated: “While many market commentators are suggesting that interest rates will rise by about 100-125bps during the course of this year (2016), even if these anticipated increases occur, interest rates will remain low by historical standards and, with inflation heading upward, the increase in real rates (taking inflation into account) will be more muted than the hikes in nominal interest rates suggest. One must bear in mind that at the height of the global economic crisis the prime rate in South Africa reached 15.5%.”

How will this affect consumers?
According to Ian Wason, CEO of DebtBusters, SA’s largest debt counsellor, this is not good news for consumers, especially those already struggling with debt.

Goslett highlighted that there have been previous warnings that South Africa is in the midst of a rate hiking cycle. “The rate increase, along with issues such as poor economic growth, rising food prices due to drought conditions and the possibility of an increase in electricity tariffs will continue to place additional financial pressure on consumers, who will need to make the necessary financial adjustments to endure the tough times ahead. Future rate increases could be a tipping point for many South African consumers who will no longer be able to service their financial commitments.”

Wason added: “Consumers were already struggling with their debt before this announcement. An increase in their loan repayments now is the “debt-end” we have been warning consumers about. There is no more wiggle room left for South Africans that live on credit.

“The cost of living is increasing and credit providers are tightening their lending belts. Consumers that have been living off credit are becoming more and more dependent on expensive unsecured ‘pay day’ type loans to keep their families afloat. These people are caught in a debt trap.”

Furthermore, Wason has warned that consumers are in for tougher financial times, with many South Africans already having started the year off with too much debt and not enough money to live on.

Golding noted that he does not anticipate interest rates to be increase by several percentage points as has happened in the past. At the same time he said that consumers should not be too sensitive to the higher interest rate, a contradiction to what Wason has stated.

Golding revealed: “In general households have reduced their debt in the wake of the 2008 crisis so will not necessarily be as sensitive to higher interest rates as they were at the time of the global financial crisis. Furthermore, those employed in the public sector – the largest source of employment in South Africa – continue to receive above inflation salary increases.”

To prevent yourself from falling into a further debt trap, Wason advised that consumers avoid taking on additional credit at this time or buying unnecessary items. Rather than taking on more debt, consumers should be paying as much as they can into their debt.