When the South African Reserve Bank (SARB) governor Lesetja Kganyago last week announced a repo rate hike of 25 basis points to 6%, banks, businesses and South Africans were up in arms.
Yet economists expected the increase. The SARB governor said high levels of wage growth, currency fluctuation, and ESKOM increases had an impact on the decision made by the Monetary Policy Committee (MPC).
The rand has been sensitive to shifting global risk perceptions relating to the Greek crisis and monetary issues between USA and China. Consumption in households increased and food prices remain a huge concern to the MPC.
Comments from local business owners stated they were disappointed. This is because the repo rate hike has a huge impact on consumers, homeowners, and home buyers. The impact from banks will be the implementation of firmer lending regulations as well as increasing repo rates. Which might have a damaging effect on people’s bond repayments.
A housing bond of R995 000 with monthly repayments of R9 113,00 repayment increases to R9 257,00 – therefore, a household will have to find R162 from an already squeezed-dry budget.
This increase is not the end of the world though. It is true that fewer people are going to get credit or loans from financial institutions. But when we look at the history of the repo rate, it’s still not as high as it was in 1998 – when it was at its highest ever at 24%. We are amid an interest rate hike increase cycle and therefore we’ll be seeing more increases before it will stabilize or decrease.
Use equity in access bond to pay off debt faster
The government uses interest rates to manipulate the economy. Mortgages, credit cards, and other consumer loan interest rates are calculated based on the prime rate. If a person has equity in an access bond and a lot of other debt, use the money from the access bond to pay all outstanding debts while the interest rates are still relatively low.
The repo rate hike is a needed wake-up call for South Africans to change their spending habits in order to get out, and stay out, of debt. We must stop living beyond our financial means and pay off debt as soon as we can.