FILE PHOTO: Consumers have been urged to stick to their budget as interest rates hiked again. PICTURE: Getty Images
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0 DURBAN: This is expected to rise to 1% in 2024 and 1.1% in 2025, unchanged from the January MPC meeting.
The Reserve Bank has raised the repo rate by another 50 basis points (bps) to 8.25% as the country battles myriad problems including rolling blackouts, a stagnant economy and a currency at a record low.
Reasons cited by the Sarb governor, Mr Lesetja Kganyago, stem from the electricity crisis, a lack of structural economic reforms and the resultant weaker rand have left the Bank with little choice but to continue its hiking cycle.
The decision on Thursday by the Bank’s monetary policy committee (MPC) puts the repo rate at levels last seen in the aftermath of the 2007-2008 global financial crisis after which rates were lowered to boost struggling economies.
The move sees the prime interest rate, which commercial banks use to lend to customers, rising to 11.75%, which is likely to put further pressure on already overburdened South Africans.
Speaking to The Republic Mail, Ithala SOC Limited’s Chief Executive Officer, Dr Thulani Vilakazi “[t]he subsequent effects of the repo rate increase by the Reserve Bank mean that the prime lending rate (the rate banks and financial institutions charges customers increase in proportion to the repo rate increase). This then means an increase in all prime-linked loan repayment and a reduction in household disposable income with debt.
Furthermore, “[t]he increases in repo rate increases the prime lending rate, thus increasing the loan instalment. The credit standing customers in our books will be determined by a number of factors, i.e. the number and the level of credit facilities they currently have with Ithala, with other banks and financial institutions, the level of debt-to-income ratio they are already exposed to and financial cushion they have in their disposable income,” he said.
Banks such as Ithala have been growing in numbers adding new clients to their customer base. The increase in repo rate thwarts efforts for financial institutions to enlarge their client base.
“The financial strain due to the rising interest rate will be felt across our customer base, however, the severity of the strain will be measured by the level of financial planning done in the past and the disposable income to absorb the increase,” Dr Vilakazi said.
The Sarb now expects SA’s economy to record growth of 0.3% this year following forecasts of 0.2% in March and 0.3% in January. This is expected to rise to 1% in 2024 and 1.1% in 2025, unchanged from the January MPC meeting.
Asked if the recent increase in repo rate will affect the borrowing appetite, Dr Vilakazi said, “[t]he rise will not affect the borrowing appetite of the customers who need credit facilities but the impact will be felt by the customer with high ticket value credit facilities, which they have felt in the past 9 consecutive hikes in the repo rate.”
As consumers continue to tighten their seatbelts, Mr Kganyago said, “[g]uiding inflation back towards the mid-point of the target band can reduce the economic costs of high inflation and achieve lower interest rates in the future.”
Consumers are encouraged to make use of budget tips and management of expenses to avoid financial strain.
According to Dr Vilakazi, “[t]he priority should be on the better management of expenses of all the spheres of society. Make a budget and stick to it, harder than it sounds but it is possible and should be encouraged to be a norm.
“Basic needs to be priorities based on the availability of funds, delay the need for gratification and thus the need for a high credit facility. Basic needs that need credit facilities must also be managed in a moderate way,” he added.
All five members of the MPC voted for the 50 bps increase.
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