Reserve Bank raises repo rate to 7.25%, adding pressure on indebted households - IOL

The repo rate has risen to 7.25%, putting added pressure on South African households already facing higher fuel, transport and living costs.

South African households face higher debt repayments after the Reserve Bank raised the repo rate by 25 basis points prompting warnings of financial pressure on consumers battling higher fuel, transport and living costs.

The Monetary Policy Committee unanimously increased the repo rate from 7% to 7.25%, taking the prime lending rate from 10.50% to 10.75%. The increase takes effect today and is the second rate hike this year.

Reserve Bank Governor Lesetja Kganyago said global supply shocks linked to conflict in the Middle East and the Russia-Ukraine war were adding to inflation risks. The Bank raised its inflation forecast for this year to 4.4%, with headline inflation expected to move above 5% later this year and early next year.

The Bank forecasts annual economic growth of 1.2%, despite GDP contracting by 0.2% in the second quarter.

Trade union federation Cosatu criticised the decision, saying higher borrowing costs would hit workers whose finances were stretched.

“Home loans and other debt linked to the repo rate will now become even more expensive and difficult to service for millions of struggling workers. It will squeeze workers’ badly overstretched wages further. It will take money out of an already weak economy,” the trade union federation said.

Cosatu said workers were already contending with increases in petrol and diesel prices, rising public transport costs and above-inflation electricity tariff increases.

“Most workers are drowning in debt and borrowing simply to pay for food, electricity and transport and service unaffordable debt,” it said.

The federation argued that inflation pressures were being caused by international developments rather than strong domestic demand and called on the Reserve Bank to avoid further rate increases.

It also urged Treasury to reconsider fuel levy relief until fuel prices return to pre-war levels.

Sanlam Investments economist Patrick Buthelezi said the decision reflected concerns about persistent inflation pressures, particularly services inflation and its potential effect on wages and inflation expectations.

“Concerns are more about persistent services inflation which advanced to 5.1% in August. Services inflation tends to influence wages and inflation expectations. Although the latest inflation expectations eased, they are still above the target of 3%,” Buthelezi said.

He said the Bank was maintaining a restrictive monetary policy stance to limit the risk that price pressures become more entrenched.

While the Reserve Bank’s quarterly projection model points to unchanged rates and possible easing next year, Buthelezi said policy was likely to remain “higher for longer”.

PSG Financial Services chief economist Johann Els said the unanimous decision was firmer than he had anticipated, but he did not expect another increase under current conditions.

“I expected the decision to be close, with a strong case for a rate hike. However, the fact that it was unanimous was more hawkish than I expected,” Els said.

He said the Bank appeared concerned that the prolonged global supply shock could lift inflation expectations and make it harder for inflation to return towards its 3% target.

“So my expectation is no further rate increases after this one, under current circumstances,” Els said.

TransUnion South Africa estimated that the increase would add about R160 to R170 a month to repayments on a R1 million home loan, while a R2 million bond could cost an additional R320 to R340. Someone financing a R400 000 vehicle could pay about R65 more a month.

TransUnion said 38.8% of consumers expected difficulty paying future bills and loans, while household debt-to-disposable income rose to 62.2% in the first quarter.

TransUnion Africa chief executive and regional president Lee Naik said affordability remained fragile.

“Consumers have demonstrated remarkable resilience, but affordability remains fragile and increasingly sensitive to further cost increases. Today’s rate increase adds pressure to households already facing elevated fuel costs, transport expenses and ongoing affordability challenges,” Naik said.

TransUnion cautioned that further monetary tightening could put renewed pressure on repayments, particularly in unsecured lending, where delinquency rates remain elevated.

According to TransUnion, consumers were likely to cut discretionary spending, review household budgets and delay major purchases as they prioritised debt repayments and essential expenses.