Repo rate increase could hurt over-indebted consumers, economy

Was the repo rate increase a good decision for consumers?

Increasing the repo rate by 25 basis points to 3.75% might have been a good decision for the hawks on the Monetary Policy Committee (MPC) of the Reserve Bank (Sarb) who want to keep inflation in check, but economists and consumers agree that it was not a good decision for already over-indebted consumers or the weak South African economy.

This week’s increase was the result of a split decision, with three of the five members voting for the increase, while the other two wanted the rate to remain unchanged.

The increase means that the prime rate offered by the banks is now 7.25% and although it is still lower than two years ago, consumers are not in the same position they would have been if the pandemic did not happen.

ALSO READ: Inflation panic drives MPC to increase repo rate by 25 basis points

Decision against consensus

The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) decided to increase the repo rate by 25 bps to 3.75% upon conclusion of its final meeting of 2021. The decision to hike was against the consensus for a hold.

Voting turned decidedly hawkish this round, with three members of the MPC choosing to increase and two members opting for an unchanged rate, according to Oxford Economics.

The question remains if this was the right decision for South African consumers in the current economic situation, with a fourth wave of Covid-19 looming in the next two months, price increases on the back of the massive petrol price increase, and load shedding.

Consumer debt remains at R1.9 trillion.

According to Oxford Economics, the decision to increase the repo rate went against the consensus view to keep rates unchanged.

“It was a much tighter call compared to previous meetings. We revised our forecast to reflect more aggressive monetary policy tightening over the medium term.

“Our medium-term forecast has 75 bps increases built in for each of the next two years. Although we expected the Sarb to keep rates steady this round, we maintained the notion that the initial increase would be gradual and not exceed 25 bps.”

ALSO READ: Economists expect repo rate to stay the same ahead of festive season spending

Why increase the repo rate now?

The group says the Sarb seemingly wants to avoid running the risk of playing catch-up with inflation and that the increase gives them some breathing room.

“However, much will depend on external conditions and how domestic inflation behaves over the coming months.”

Dr Andrew Golding, chief executive of the Pam Golding Property group, says despite potential risks to the upside, South Africa’s inflation rate remains close to the mid-point of the inflation target.

“While it is widely acknowledged that interest rates need to start normalising soon, there are concerns that raising interest rates now may hamper our still fragile economic recovery. Therefore, the MPC’s decision to increase the repo rate is disappointing for first-time home buyers and consumers with existing mortgages.”

ALSO READ: Repo rate stays put for now, but prepare for an increase soon – economists

Implications for consumers

The pandemic is associated with job losses, salary cuts and small increases if at all, and has taught consumers to budget carefully, and this increase will affect people who budget to the last cent. The increase now means that someone with a home loan of R1 million will have to fork out an extra R151 to afford a monthly payment of R7 904, up from R7 753.

Consumers also have to get ready for more increases in 2022, says Tony Clarke, MD of the Rawson Property Group.

“The MPC has already expressed concern over the effect Eskom’s tariff hikes and unstable oil prices will have on inflation. If this rises too far above the inflation target midpoint of 4.5%, the Sarb is very likely to increase interest rates as a control measure.”

ALSO READ: Reserve Bank raises repo rate to 3.75% after power cuts dim SA economy

How indebted are consumers?

South African consumers have always had a bad credit record with very little savings.

The latest debt statistics available is for the second quarter of 2021, before the unrest in July and the recent petrol price increase.

According to the Consumer Credit Market Report of the National Credit Regulator (NCR) for the second quarter:

• the total value of new credit granted increased by 5.81% compared to the first quarter, from R138.81 billion to R146.87 billion
• the number of credit agreements increased by 9.63% compared to the first quarter from 3.20 million to 3.50 million
• the value of new mortgages granted increased by R2.32 billion (4.27%) compared to the first quarter and by R43.60 billion (335.77%) compared to the second quarter of 2020
• secured credit, which is dominated by vehicle finance, increased by R2.23 billion (5.45%) compared to the first quarter and by R22.67 billion (110.50%) compared to the second quarter of 2020
• credit facilities increased by R1.18 billion (6.02%) compared to the first quarter and by R11.33 billion (119.24%) compared to the second quarter of 2020
• unsecured credit increased by R2.32 billion (11.51%) compared to the first quarter and by R12.23 billion (119.71%) compared to the second quarter of 2020
• the total outstanding consumer credit balances (gross debtors’ book) in June 2021 was R2.05 trillion, representing an increase of 0.95% compared to the first quarter and 4.64% compared to the second quarter of 2020
• the mortgages debtors book increased by R18.16 billion (1.74%) compared to the first quarter and by R76.48 billion (7.77%) compared to the second quarter of 2020
• the secured credit debtors book increased by R3.12 billion (0.68%) compared to the first quarter and R16.06 billion (3.62%) compared to the second quarter of 2020
• the credit facilities debtors book increased by R1.53 billion (0.58%) compared to the first quarter and R8.66 billion (3.36%) compared to the second quarter of 2020
• the unsecured credit debtors book decreased by R2.77 billion (1.30%) compared to the first quarter and R10.72 billion (4.85%) compared to the second quarter of 2020
• credit bureaus held records for 26.22 million credit-active consumers, a decrease of 4.77% compared to the 27.53 million in the previous quarter
• consumers classified in good standing decreased by 868 581 to 16.14 million consumers
• the number of impaired accounts decreased from 20.18 million (23.71%) to 19.86 million (23.34%) in June 2021, a decrease of 313 348 compared to the first quarter and 796 144 compared to the second quarter of 2020

The Experian Consumer Default Index shows that consumers defaulted to the value of R19.15 billion for the first time during the second quarter, and the rate of people defaulting on their loans for the first time decreased in the second quarter of the year.

According to credit bureau TransUnion, the overall number of consumers participating in the credit market has not materially grown compared to pre-pandemic levels, but the total amount borrowed as measured by outstanding balances has continued to increase for all major consumer credit products.

A general rise in delinquencies across most major consumer lending categories also contributed to growth in outstanding balances, as missed payments accrued and principal amounts remained outstanding.

However, in the second quarter, with the exception of personal loans, delinquencies stabilised and decreased, with credit card balance-level delinquencies down 50 basis points from their peak in the second quarter of 2020 to 12.3%, the same level as Q2 2019.