South Africans paying the price of high interest rates – for no reason

South Africans are paying significantly more on their bonds and to service their debts due to the South African Reserve Bank’s (SARB) interest rate hikes – which were never needed. 

This is the view of economist Roelof Botha, who told Newzroom Afrika that South Africa’s interest rates do not need to be as high as they are.

In November 2021, the SARB’s Monetary Policy Committee (MPC) started its current hiking cycle when it noticed an upward trend in the country’s inflation.

Since then, it has raised interest rates by a cumulative 475 basis points, with the repo rate now at a 14-year high of 8.25% and the prime lending rate at 11.75%.

The MPC has said it will continue to keep rates high until inflation sustainable comes down to the mid-point of its target range of 4.5%.

The latest inflation print saw March’s CPI come in at 5.3%.

However, Botha said the MPC never had reason to raise rates this high, as South Africa did not have demand inflation.

“It was never necessary to raise interest rates to the levels they did. Now, a little bit more than two years later, households are paying 9% of their disposable income on average on servicing debt,” he said.

Botha said the average home loan administered by Better Bond shows that South African homeowners are paying R4,000 more on their bonds since the Reserve Bank started raising rates.

He said this extra cost represents money that could have been spent on goods and services, stimulating the economy and creating jobs. 

Not only home loans have been affected, as South African households are now paying 9% of their disposable income on average to service debt, according to the latest Altron Fintech Index.

Botha explained that the reason why South Africa had high inflation two and a half years ago when the SARB started raising rates was due to factors unrelated to consumer demand.

For example, the world saw a 700% increase in global freight shipping charges and an increase of more than 200% in the oil price due to the Russia-Ukraine war.

“Now, those freight shipping charges have come down again, and the oil price has come down to as low as $80. Our inflation rate is dropping like a stone, but the Reserve Bank is not lowering interest rates. What are they waiting for?” Botha said.

FNB economists recently warned that if the SARB continues to keep interest rates as high as they are beyond when it is necessary, South Africa could face a technical recession.

In an Economic Weekly, FNB economists said South African consumers are under increasing pressure due to the SARB’s high interest rates.

They said that despite the high interest rates, inflation has also remained persistent.

“Consequently, demand, particularly that associated with interest rate-sensitive spending, has weakened and reflects a strained consumer,” the economists said. 

They said South Africa’s economy is grappling with low economic growth, and consumers are bearing the brunt of the tight financial conditions. 

This can be seen in household consumption expenditure, which crawled at 0.7% last year, a significant drop from 2.5% in 2022.

The economists said this reflected a mild technical recession between the second and third quarters of 2023. 

“Our assessment of the restrictive broader financial conditions underscores a continued decline in inflation-adjusted credit growth,” they said. 

“Moreover, we note a weaker currency, a sharp dip in the inflation-adjusted JSE All Share index, and a sustained fall in real residential property price growth.”

They said that while inflation may have peaked, it is still not fully under control, and upside risks remain. Therefore, the Reserve Bank must be careful not to cut interest rates too soon.

However, they also warned that prolonging rate cuts beyond when high rates are necessary could further stifle growth and heighten the likelihood of a technical recession.