Beware of further interest rate hikes
THE HIGH LEVEL of household indebtedness continues to be a source of vulnerability to South Africa’s financial system in the event of an adverse shock to the repayment capacity of households. That’s the word from the SA Reserve Bank’s latest Financial Stability Report. The report doesn’t elaborate, but the comment implies further interest rate increases could harm SA’s banking system. When the rand crashed to close to around US$1/R11 there were fears the Bank would raise interest rates further to stem the rout.
The report says financial crises are often accompanied by heightened household sector vulnerability that spills over into the financial system. The upturn in the interest rate cycle – plus rising food and fuel prices – have put pressure on the finances of the household sector. That increased strain is reflected in house and car repossessions, the drop in the number of vehicles sold and increasing insolvencies.
After soaring to a peak of 78,2% in first quarter 2008, the ratio of household debt to disposable income dropped to 76,7% in the second quarter.