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Interest rate increase will hit consumers, SMEs

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The 25 basis point increase in interest rates will come as a blow to consumers who are already under pressure and make it more difficult for them to service their debt.
South African Reserve Bank (SARB) governor Lesetja Kganyago yesterday announced that interest rates will increase by 25 basis points on the back of the marked depreciation of the rand, drought conditions and possible related food price increases, looming electricity tariff increases, a deteriorating economic outlook and the likelihood of the US Fed raising interest rates next month.
The bank’s Monetary Policy Committee (MPC) increased the repurchase (repo) rate, the rate at which the central bank lends money to banks, by 25 basis points to 6,25% as unemployment continued to rise and household expenditure lost further momentum. Unsecured lending remained subdued and is likely to decline further due to the implementation of new regulations, Kganyago says.
The prime lending rate, the rate at which banks charge their clients interest, increased similarly to 9,75%. The rate at which many South Africans borrow, however, is significantly higher, particularly if they are seeking unsecured lending. South Africans on fixed rate unsecured lending will not be affected as only loans taken out after the interest rate hike will be priced higher. But those on floating rates will feel the pinch.
Izwe Loans CEO Rayanne Jacobson says that, as we go into the festive season, consumers should be wary of taking out unsecured credit to fund consumption spending as the effect on their pocket will be exacerbated by the rate increase.
Jacobson points out that the current interest rate calculation for unsecured lendingĀ  is calculated at a multiple of 2,2 times the repo/bank rate with an added margin. New regulations on interest rate caps, expected to be implemented mid next year, have done away with the multiple, which is good news for consumers.
However, floating rate debt, which applies to home loans, cars, credit cards and overdraft are prime-linked. “Floating rate debt has become a lot more expensive. Consumers may not feel it immediately, but the combined effect of festive season spending and the floating rate coming up may hit them hard in the new-year.”
The latest decision follows a decision in September to leave the repo rate unchanged at 6%, and a July 25 basis point increase. While interest rate increases have been small and edging up slowly, the cumulative increase since the first upward move in January 2014 is 125 basis points.
The latest rate hike will mean that repayments on a R1-million home loan over 20 years will increase by R166.22 a month to R9 816.43 (R9 650.22) while repayments on a R250 000 car over five years will increase by R30.80 a month to R5 342.57 (R5 311.76) – assuming an interest rate of 10% increasing to 10,25%.
But taking into account the rate increases since January 2014 using the same baseline (increasing to 11.25%), consumers are now paying R842.34 more a month on their home loan repayments and R155.07 more on their cars than they were in January 2014.
Jacobson says consumers “should focus first on curbing consumption spending and paying down their most expensive debt. They should also focus on paying back debt that is at a floating rate and try to contribute slightly more every month to repayments to bring debt down.” Paying a portion of one’s annual increase into debt repayment would be a wise decision.
She says consumption spending is dangerous, particularly at the higher interest rate. However, she said there is “still a place for transformative and productive borrowing” including funding to pay school fees or improve one’s house, where debt will be used productively to produce income, increase the value assets or improve knowledge to earn more money.
For SMEs, the increased interest rate will add more press by making it more expensive to service debt, says Sanjeev Orie, CEO of business value-adds at FNB.Profit margins are also likely to be impacted in the long term due to a lower demand from consumers that will tighten their belts as disposable income decreases.
For most of the middle class consumers, a rate hike typically means an increase in mortgage and vehicle repayments, he says. This means that businesses that are highly geared and operating on low margins may struggle to service their debt commitments.
As a result, small businesses may run into cash flow problems, making it difficult for them to manage running costs and payments to staff and suppliers for goods and services, says Orie. Moreover, the possibility of further interest rate hikes next year will require SMEs to place more emphasis on their annual cash flow forecasts and regularly review them as business conditions change.
Difficult trading conditions coupled with natural resources constraints are likely to make things more difficult for SMEs in the coming year. SMEs in the import and export sector are also being heavily hit by the depreciation of the rand, made worse by the combined effect of rising inflation.
Higher interest rates could also discourage businesses from expanding as the cost of expansion becomes increasingly more expensive, according to Orie. Most start-up businesses have little equity and rely on debt. However, businesses with low gearing and high levels of excess cash may benefit from high interest rates since the excess cash can be invested for a higher return.