Interest rates were hiked last week, and whilst people have heard it mentioned in the news, many people still don’t understand what it really means and how it affects their lives.
Here is a breakdown of how rising inflation and rising interest rates affect you, and specifically your debt.
– When inflation is high, interest rates are hiked. What is inflation?
When the price of goods and services like housing, clothing, food, transportation and fuel are increasing steadily, the economy is undergoing inflation. In practical terms, it means that the average consumer will have to spend more to get the same things they got before.
– What are interest rates now at, since the South African Reserve Bank’s (SARB’s) Monetary Policy Committee hiked it by 50 basis points on Thursday, 30 March 2023?
The repurchase rate is now 7.75% and the prime lending rate is 11.25%.
Has South Africa’s interest rates ever been this high?
Rates in SA are now at their highest point in 13 years – since June 2009 – when the fallout from the global financial crisis weighed on the local currency.
For how long is inflation and interest rates expected to rise?
Most economists predict that we will see another interest rate increase in May – and that rates could decrease towards the end of the year.
Why does our government increase interest rates in response to rising inflation?
As inflation rises, the central bank of a country may increase interest rates to manage the economic impact of rising prices. Higher interest rates can help reduce consumer spending, attract foreign investment, maintain the value of bonds, prevent a currency crisis, and encourage savings.
How does high inflation and high interest rates affect your debt?
Interest rates are an important component of debt. The higher the interest rate, the higher your debt repayments will be.
Do you feel like you are the only one who has debt?
You could not be more wrong.
South Africa has nearly 19 million credit–active consumers.
The loan balances on this consumer debt is R2.3 trillion.
In the last quarter of 2022, more than 800 000 consumers entered the credit market. These new entrants took out R9.3 billion in new loan value. There has also been a significant surge in credit card balances with total loan balances up to R25 billion.
You are not imagining by how much the prices of basic foods have increased. Here are some increases from March 2022 to March 2023
1. Onions: +67%
2. Potatoes: +52%
3. Carrots: +30%
4. Green pepper: +30%
5. Maize meal: +26%
6. Samp: +24%
7. Cabbage: +22%
8. Cake flour: +20%
9. Stock cubes: +19%
10. Brown bread: +17%
11. White bread: +17%
12. Cooking oil: +16%
13. Spinach: +15%
14. Tomatoes: +14%
15. Canned beans: +12%
16. Full cream milk: +12%
17. Tinned pilchards: +12%
18. Chicken feet: +11%
19. Curry powder: +10%
20. Maas: +10%
21. Wors: +10%
22. Gizzards: +10%
23. Fish: +10%
24. Apricot jam: +10%
Why have food prices increased by so much?
According to the Bureau for Food and Agricultural Policy (BFAP) the following factors are responsible for persistently high food price in South Africa:
– The weaker rand;
– Persistent and escalating load shedding;
– Hot and dry conditions in key production areas (e.g. South America);
– Geopolitical unrest (war in Ukraine);
– Supply chain disruptions; and
– Animal diseases
As long as it is costing producers and manufacturers more to get their goods out to the market, the more consumers will pay when it reaches the shelves.
What happens when interest rates rise?
– The cost of borrowing money increases
– Consumer demand decreases
– Those saving money earn more interest
– Buying a home becomes more expensive
– Debt repayments increase
How much of take-home income do South Africans generally spend on their debt?
This figure stands at a staggering 75%.We should be looking in the region of 25% – 30%
By how much will a bond repayment go up to, due to the 50 basis point increase?
– R750 000 bond – extra R255, from R7 614 to R7 869
– R900 000 bond – extra R306, from R9 137 to R9 443
– R1m bond – extra R341, from R10 152 to R10 493
– R1.5m bond – extra R511, from R15 228 to R15 739
– R2m bond – extra R339, from R20 305 to R20 985
– R2.5m bond – extra R424, from R25 381 to R26 231
By how much has monthly bond repayments increased since the start of the rate hikes in November 2021?
The best way to answer this is by using an example:
The monthly bond repayment on a R2 million home loan has to date, increased by R5 500p/m
What SHOULD you be doing in response to rising interest rates?
– Get your finances in order
– Commit to paying off your debt and becoming debt-free
– Create an emergency savings fund
– Get advice from professionals in the financial space – eg; a registered debt counsellor, a financial advisor, insurance advisor etc
– Find solutions to your debt problems
What should you NOT be doing in response to rising interest rates?
– Don’t panic
– Don’t make rash financial decisions (like cutting necessary insurances)
– Don’t incur more debt to pay off existing debt
– Don’t be in denial about your finances
There is no time like the present to commit to getting your finances under control. We are in for a rough ride.
dailyvoice@inl.co.za