Father Christmas might be broke

Yesterday’s interest rate hike of 25 basis points will cause all debt repayments, such as mortages and vehicle and credit card payments, to increase, putting additional financial strain on consumers, economists warned yesterday.

The hike announced by the Reserve Bank’s Monetary Policy Committee (MPC) brings the prime lending rate to 9.75%. Further hikes in lending rates are forecast for 2016, said Jacques du Toit, senior economist at Absa Bank.

He said the hike came against the background of expected inflationary pressures due to the lagged effect of the severe drought on food prices, a weakening rand and the prospect of rising interest rates in the US before year-end and during next year.

Neil Roets, CEO of debt management company Debt Rescue, said the combination of the severe drought in prime food producing areas, coupled with the increase in the interest rate and the weakening of the rand, would have dire consequences for poor people. He warned the repo rate hike could push food inflation as high as 10% with “catastrophic results for deeply indebted South Africans”.

In the past six months, the company has experienced higher growth rates of people who stack up debt they cannot repay and who are compelled to seek help from debt counselling, Roets said.

Professor Raymond Parsons of the North West University Potchefstroom Business School said the higher interest rate would have a negative impact on already low levels of consumer and business confidence.

“Furthermore, the global and domestic uncertainties referred to by the MPC argue against pushing SA further into a rising rate cycle at this juncture, rather than in favour of it.

“Several of these factors, such as the possible decision by the Federal Reserve to raise US interest rates next month, could have been reassessed at the MPC’s next meeting in January and not seemingly pre-empted at this stage,” Parsons said. Independent economist Dawie Roodt said: “Deeply indebted consumers are incredibly vulnerable at the moment because of issues such as the weakening rand which is going to translate into increased prices for all imported goods.”

The 25 basis point increase in interest rates will come as a blow to consumers who are already under pressure and make it more difficult for them to service their debt.

The bank’s Monetary Policy Committee (MPC) increased the repurchase (repo) rate, the rate at which the central bank lends money to banks, by 25 basis points to 6.25% as unemployment continued to rise and household expenditure lost further momentum. Unsecured lending remained subdued and is likely to decline further due to the implementation of new regulations, Kganyago said.

The prime lending rate, the rate at which banks charge their clients interest, increased similarly to 9.75%. The rate at which many South Africans borrow, however, is significantly higher, particularly if they are seeking unsecured lending. South Africans on fixed rate unsecured lending will not be affected as only loans taken out after the interest rate hike will be priced higher. But those on floating rates will feel the pinch.

Izwe Loans CEO Rayanne Jacobson said that as we go into the festive season, consumers should be wary of taking out unsecured credit to fund consumption spending as the effect on their pocket will be exacerbated by the rate increase.

Jacobson pointed out that the current interest rate calculation for unsecured lending  is calculated at a multiple of 2.2 times the repo/bank rate with an added margin. New regulations on interest rate caps, expected to be implemented mid next year, have done away with the multiple, which is good news for consumers.  However, floating rate debt, which applies to home loans, cars, credit cards and overdraft are prime-linked. “Floating rate debt has become a lot more expensive. Consumers may not feel it immediately, but the combined effect of festive season spending and the floating rate coming up may hit them hard in the new-year.”

The latest decision follows a decision in September to leave the repo rate unchanged at 6%, and a July 25 basis point increase. While interest rate increases have been small and edging up slowly, the cumulative increase since the first upward move in January 2014 is 125 basis points.

The latest rate hike will mean that repayments on a R1m home loan over twenty years will increase by R166.22 a month to R9 816.43 (R9 650.22) while repayments on a R250 000 car over five years will increase by R30.80 a month to R5 342.57 (R5 311.76) – assuming an interest rate of 10% increasing to 10.25%.

But taking into account the rate increases since January 2014 using the same baseline (increasing to 11.25%), consumers are now paying R842.34 more a month on their home loan repayments and R155.07 more on their cars than they were in January 2014.

Jacobson said consumers “should focus first on curbing consumption spending and paying down their most expensive debt. They should also focus on paying back debt that is at a floating rate and try to contribute slightly more every month to repayments to bring debt down.” Paying a portion of one’s annual increase into debt repayment would be a wise decision.

She said consumption spending is dangerous, particularly at the higher interest rate. However, she said there is “still a place for transformative and productive borrowing” including funding to pay school fees or improve one’s house, where debt will be used productively to produce income, increase the value assets or improve knowledge to earn more money.
Bond originator ooba warned that the interest rate would negatively affect residential housing markets. Kay Geldenhuys, ooba manager for property finance processing, said: “This decision will unfortunately negatively impact many consumers who are already facing increasing financial strain through dealing with elevated levels of debt and the rising cost of living expenses.” – Citizen reporter v Additional reporting by Moneyweb