How the SA Reserve Bank interest rate hike affects South Africans

The South African Reserve Bank (SARB) surprised the country on Thursday by announcing that it would hike the country’s repo rate by 50 basis points, defying market expectations of a 25 basis point hike.

This hike raised the country’s repo rate to 7.75% and the prime lending rate to 11.25% – the highest level since 2009.

This marks the ninth consecutive increase in the current hiking cycle, which started in November 2021.

The people most negatively impacted by this hike are those who are in debt or paying off loans linked to the interest rate, like vehicle finance or home loans. This is because the monthly repayment will increase alongside the interest rate.

Head of marketing and communication at WesBank, Lebogang Gaoaketse, said an interest rate hike has a ripple effect across all sectors of the economy. WesBank customers that opted for a linked rate on their loans will be most affected by it. 

“Those customers whose vehicles are financed through WesBank with a fixed interest rate are not affected by the rate hike. However, those customers who opted for a linked rate will see their monthly car repayment increasing.”

This is because a linked interest rate, unlike a fixed interest rate, fluctuates with the SARB’s repo interest rate. This can, therefore, be either good or bad, depending on the volatility of the rate.

A lower rate means lower monthly repayments, but a higher rate means higher monthly payments.

This applies to all forms of credit linked to the interest rate, like credit cards, home loans and clothing accounts. 

“Consumers with additional debt will notice the increased repayments starting to affect their budgets, as household debt levels in South Africa remain high,” said Gaoaketse.

Thys van Zyl, head of product development at Everest Wealth, said the problem with this latest interest rate hike is that consumers’ salaries cannot keep up with the rising interest rates.

“Consumers who took on the debt when the interest rate was much lower may now struggle to service their debt or simply cannot afford it anymore,” he said.

“The average salary in the country does not increase at the same rate and makes South Africans increasingly poor.” 

However, he said the hike could positively or negatively affect investors.

People with investments and money in the bank are positively affected by the increase.

Cash investments are generally beneficial in times of increasing interest rates, as banks usually raise the amount investors can earn from fixed deposits and savings accounts, according to Miranda Van Rensburg, national sales manager at M&G Investments.

However, she said the interest rate investors see from these investments may still be lower than inflation, which means the real rate of return could still be negative.

Conversely, equities are negatively impacted by higher interest rates as they damage company earnings and stock valuations.

“In terms of earnings, borrowing costs and input costs become more expensive, while consumer spending slows down. The combination of higher costs and a reduction in sales results in lower corporate profitability.”

When it comes to fixed-income instruments, higher inflation negatively impacts the value of bonds already in issue, which, in turn, causes investors to demand higher interest payments for their holdings.

Conversely, newly issued bonds entering the market after an interest rate increase typically offer investors a higher interest rate.

While investors could benefit from this latest rate increase, it should also be noted that other expenses for South African consumers will continue to increase, which may necessitate withdrawing money from investments to keep up.