Interest rate hike panic: no need for drastic measures

There is another interest rate hike looming for the month of September. If you are one of those people who took advantage of the really low repo rate during Covid-19, and purchased your dream home or car, you are probably going to feel the hike in your monthly payments more than anyone.

The Money-Stress Tracker survey, released by DebtBusters, a leading debt counselling company, indicates that with the interest rate hike looming, over half (52%) of the people polled feel stressed and anxious about running out of money before month-end.

The survey revealed that over 70% of the people polled indicated that the financial stress was spilling over to their work life, while another 76% said that even their health was being affected by their financial issues.

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But is there really need to be this anxious? Absa’s Group Financial Officer, Jason Quinn, said what South Africans are seeing with the rising of the interest rate, is actually a normalisation.

Quinn was speaking on the back of the media briefing on the release of the Absa Group Interim Results. 

He said with Covid-19, the interest rates had dropped far below expectation, with a repo rate as low as 3.5% – something that no one thought they would see from the repo rate in months before the pandemic hit.

“We were always expecting to see it normalise again. That has just been happening quicker than expected though,” he said, referring to the steep curve.

But even this is still no real reason to fear. Quinn assured that the bank did not just lend on a whim when the rates were low, but took into account how much it could rise again, and factored this into its loan arrangements, ensuring that their customers would likely be able to still navigate through this change in their payments in the future.

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This offers some encouragement for South Africans who are in a panic state.

JustMoney‘s Marketing Manager Shafeeka Anthony, also assured South Africans that there was no need to resort to the extremes just to get out of debt.

Anthony said that while it is understandable to reach for a cash lifeline when one feels like they are drowning financially, one has to ask those vital questions before withdrawing savings or investments that may have taken decades to accumulate (Why do I need the cash; Am I facing a real emergency? Am I budgeting correctly? Etc).

“Drawing on savings can seem like a good solution when you are struggling with your budget. But this could jeopardise your financial goals and destroy the gains accumulated over many years. Retirement may seem a long way off, but there will come a time when you can no longer earn an income,” Anthony said.

She advised that there are rather other debt solutions to consider, such as combining all of one’s debt repayments into a single monthly amount, at a lower interest rate.

The only positive reason for moving your cash out of a savings account, said Anthony, is to make your money work harder.

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“With inflation on the rise, you don’t want your money to lose its purchasing power over the long term. The general rule is to have six months’ worth of living expenses accessible in your savings account. If you hold more cash than this in an everyday savings account, then it could be worth moving the excess to a suitable investment that offers better returns. This will help you to keep up with or beat inflation.

“Of course, before making any changes, it is worth speaking to a financial adviser, who will take a holistic, objective view of your finances. Also, speak to your tax consultant about the tax implications of withdrawing or re-allocating funds,” said Anthony.

The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) members are set to follow in favour with another 75 basis point hike in the repo rate this coming September. Last month, one member of the MPC preferred a larger increase of 100 basis points and three favoured an increase of 75 basis points.

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