Repo rate cut too little too late for consumers on edge of financial ruin?

The repo rate cut was too little too late for millions of consumers who are on the edge of financial ruin, sinking deeper into debt, fuelled by the highest interest rate the country has seen in over a decade.

Although South African Reserve Bank (Sarb) governor Lesetja Kganyago’s announcement of a “miniscule” 25 basis points cut in the repo rate last week elicited a small sigh of relief from many quarters, this was not enough to help the millions of households across the country who are hovering on the brink of financial ruin, Neil Roets, CEO of Debt Rescue says.

“While any relief is welcome, this small reprieve will not make any significant difference in the lives of over half of the South African population (55%) currently living in poverty. It will also do little to nothing to pull the middle class out of the financial ruin that is the final consequence of indebtedness.

“People have reached the end of the road and they have nowhere left to turn. It is time to heed this ticking time bomb before it is too late,” he warns. 

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Repo rate of 8.25% for more than a year

The Monetary Policy Committee raised interest rates by a massive 475 basis points since 2021 after extreme inflationary pressures hit the South African economy following the Covid-19 pandemic. This took the repo rate to a 15-year high of 8.25%, where it remained since May last year.

Economists predicted the repo rate cut, supported by the latest annual Consumer Price Inflation figures showing that the annual inflation rate eased for a third month to 4.4% in August 2024, down from 4.6% in July and below the expected 4.5%. This was the lowest inflation rate since April 2021, falling just below the South African Reserve Bank’s preferred midpoint target of 4.5%.

In addition, the US Federal Reserve Bank’s aggressive rate cut of 50 basis points announced on Wednesday is widely viewed to have added impetus to the Sarb’s decision to reduce the repo rate, as this means a likely easing of global financial conditions, supporting a stronger Rand.

ALSO READ: Inflation now expected to average 5.1% this year

Inflation not expected to stay low enough

The Bureau for Economic Research stressed that its recent inflation expectations survey, which the Monetary Policy Committee (MPC) references in its decisions, showed that inflation is expected to average 5.1% in 2024 and 4.8% in 2025 and 2026, above Sarb’s target. Roets says it remains to be seen how Kganyago will respond to this.

He points out that the implementation of the new two-pot retirement system will likely result in higher inflation in the coming years and in turn, elevated interest rates to ensure price stability. “This is deeply concerning as South Africans simply cannot survive another year of elevated interest rates.  We cannot allow this to become the ‘new normal.”

Chief economist at Momentum Investments, Sanisha Packirisamy, agrees and says that while the two-pot retirement system may benefit South Africa’s economy in the short term, it will also result in higher inflation and interest rates.

ALSO READ: Two-pot retirement system: Two weeks and already a few billion rands later

South Africans will have debt-to-income ratio of 65% this year

Another manifestation of the nation’s financial crisis is the number of South Africans seeking debt counselling. Roets points to the increase in borrowing costs over the past three years that put significant pressure on consumers, especially homeowners.

According to Trading Economics’ global macro models, household debt-to-income in South Africa is expected to reach 65% by the end of 2024. This means that consumers will spend 65% of their income on repaying debt before paying for anything else.

FirstRand Group CEO Markos Davias said recently that debt counselling inflows are showing on higher value loans, particularly in the private segment with a focus on the home loan as well as unsecured portfolios.

He said the increase in FirstRand’s retail debt counselling portfolio means potentially higher default rates from customers and a lower ‘loss given default’ (LGD) experience over the medium term. FirstRand’s credit loss ratio increased slightly to 0.81% due to strain from consumers with residential mortgages and personal loans.

According to Davias, the strain that the “higher-for-longer” interest rate cycle has placed on consumers, coupled with debt counselling inflows, has also led to a higher formation of non-performing loans (NPLs), meaning that debtors do not make their scheduled payments on time or in full.

Roets says this kind of ongoing financial pressure has led to a significant surge in debt counselling enquiries, reflecting a worrying trend in the financial behaviour of South Africans and that the repo rate cut, while positive, will make a very small dent.