Possible interest rate relief from mid-year
Stubborn inflation from a mix of global and local factors has forced the South African Reserve Bank to relentlessly hike interest rates over the past three years, with the prime lending rate rising steadily from 7% in December 2020 to peak at 11.75% in mid-2023.
“High interest rates are feeding into the cost of living crisis by increasing the cost of debt across the market,” says Alfred Ramosedi, CEO at Bayport Financial Services.
“This severely impacts disposable income, which limits a consumer’s ability to access formal credit, encouraging them to turn to the informal sector seeking credit from unregulated providers.”
While the broad consensus among economists suggests that the Bank’s monetary policy committee will keep rates steady at their 14-year highs, cuts are only likely later in 2024.
This higher-for-longer interest rate environment will maintain the financial pressure on debt servicing costs among struggling consumers and businesses.
“The longer high interest rates persist, the more difficult the lender’s position becomes, with more cash channelled to servicing debt as opposed to funding growth or efficiency initiatives within businesses, or consumer spending on goods and services,” says Frank Blackmore, Lead Economist at KPMG South Africa.
“If this continues for a long period, it can undermine resilience among businesses and consumers who lack the capacity to absorb additional shocks, such as a drop in sales or an unexpected maintenance expense.”
“In addition, the higher-forlonger interest rate environment means banks will face lower loan growth and sustained higher credit risk costs,” says Carmel Nel, Head of Multi Asset at Amplify fund manager, Terebinth Capital.
While the Bank’s hawkish tone amid global geopolitics and uncertainties around the local elections means we are unlikely to get any interest rate relief until mid-year, Nel believes moderating inflation should open the door for rate cuts.
“Lending growth should improve as the probability of interest rate cuts increases as monetary policy easing would improve risk appetites among banks. On this front, we are already seeing signs that credit loss ratios are peaking, which should serve as a positive for credit provision to consumers. It is unlikely that credit lending standards will tighten further from here.”
When the cycle eventually turns, Blackmore says the potential exists for multiple rate cuts throughout the remainder of the year. “However, unlike in countries such as the US, the Bank did not need to elevate interest rates far above longterm averages to become restrictive. As such, expect a much smaller proportional decrease of about 1.25 percentage points over 2024 and 2025,” he says.
HIGH INTEREST RATES ARE FEEDING INTO THE COST OF LIVING CRISIS BY INCREASING THE COST OF DEBT ACROSS THE MARKET