Woes for SA consumers as repo rate surges

November 21, 2015, 8:22am




By Business Day Online

MORE woes lie in store for local consumers following the decision by the Reserve Bank to increase interest rates.

Not only are electricity prices higher and food prices on the increase, but Thursday’s interest rate hike will see home owners paying more in monthly home loan repayments.

The repo rate — the rate at which the central bank lends to commercial banks — has been raised by a cumulative 125 basis points to 6.25% between January last year and this month.

This means the prime interest rate — the rate at which commercial banks lend to consumers — is now at 9.75% from 8.50% in January last year.

Someone with a R500,000 home loan taken over a 20-year period with a floating interest rate will now pay R404 more a month due to the cumulative interest rate increases, FNB Home Loans calculations show.

This adds more challenges for consumers whose disposable incomes are already being eroded by rising food prices, higher inflation, electricity, education and medical costs.

A home owner with a R600,000 home loan will pay R484 more than what they are already paying a month. The amount rises to R807 more a month for a home worth R1m.

Home owners can look forward to even higher monthly home loan repayments next year as interest rates are still expected to rise.

Capital Economics, Barclays Africa, and HSBC SA economists expect the repo rate to increase by a cumulative 75 basis points to about 7% by the end of next year.

The Reserve Bank raised the repo rate by 25 basis points last week after lifting them by 25 basis points in July. Rates were raised by 50 basis points in January and 25 basis points in July last year.

Some property companies have not welcomed the interest rate increase. Andrew Golding, CE of southern Africa’s leading independent real estate property group, Pam Golding, referred to the hike as ill-timed.

Unchanged rates would have sent a positive signal to the housing market and boosted business and consumer confidence, he added.

Higher rates will not only affect consumers but small businesses as well.

Small businesses’ cash flows will be negatively affected by the rate increase as they will be required to pay more on their loans, said South African Chamber of Commerce and Industry chief operations officer Peggy Drodskie.

Small businesses would also possibly record lower turnovers as rising costs would lead to consumers being more careful about what they spend on, Ms Drodskie said.

However, the rate increases are good for savers as they will get more from their savings. The increase is negative for those who are overindebted.

More people will fall deeper into debt and fall behind on loan repayments due to the rate increases, registered debt counselling company DebtBusters said, urging consumers to spend only on necessities this festive season.

South African households already spend a significant amount of their disposable income on servicing debt, with household debt to disposable income remaining high at 78%, according to the Reserve Bank.

Even a small rise in borrowing costs at this stage would already have a negative effect on already low levels of consumer and business confidence, North West University economist Raymond Parsons said.