South Africa’s middle class is drowning in debt, and stresses are mounting, with ordinary folk dealing with serious financial difficulties. Over 60% of the middle class is said to have unsustainable debt levels, with many hoping that rate cuts are on the cards.
In an environment of rising interest rates, declining monthly household incomes, growing inflation, and the highest fuel prices ever experienced in the country, South Africans are facing unprecedented financial headwinds and struggling to service their debt on credit cards, retail cards, overdrafts, and personal loans.
Indebted South Africans have reached a point where the overall debt to annual net income ratio across all income groups has reached its highest level ever. In real terms, the average take-home pay in the private sector has dropped, exacerbated by the economic challenges that accompanied the COVID-19 pandemic, which still lingers, and the accompanying painstakingly slow economic recovery.
Consumers are still clamouring for unsecured credit, indicating that they are using credit simply as a vehicle to roll through from one month to the next. This kind of credit only serves to increase the overall indebtedness through increased consumption.
As interest rates climb, the increased cost of servicing that debt has left millions of South African families across the income spectrum trapped in a spiral of consumption debt.
Lower Inflation a Key Driver in the MPC Decisions
Economic insights from consultancy PwC point to South Africa having reached the end of its interest rate cycle, echoing the sentiments of fund managers and economists who are optimistic that attention is turning to rate cuts.
According to PwC’s August Economic Outlook report, the group expects the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) to hold on interest rates when it meets this month and again when it meets for the last time this year in November.
If positive economic conditions like lower inflation persist, the country could start seeing rate cuts in 2024, with around 200 basis points trimmed off the repo rate by the end of 2025. The group said that this marks a shift in sentiment around interest rates, demonstrated by the voting patterns of the MPC since the cycle started.
The Reality of Rate Cuts
The start of the rate hike cycle came in November 2021, and in the eight subsequent votes, the SARB’s MPC were united in the move to keep hiking rates. The last meeting – in July, was the first time in a year and a half that the committee was split again, voting in favour of holding rates.
The hold in interest rates immediately raised the question of whether the tightening in monetary policy was over, to which the Governor of the SARB, Lesetja Kganyago, replied: “Is this the end of the hiking cycle? No, it is not. It depends on the data and the risks; that is what it boils down to.”
This is understandable as the Governor could only realistically announce a rate hike freeze in hindsight, dictated by the evolving data, which he could not foresee.
Given this stance and the fact that data like inflation are pointing in the right direction, PwC said that it is likely that rates have peaked alongside the decline in inflation. A better-than-expected headline inflation figure in July increases the likelihood that South Africa’s interest rate hike cycle has ended, and the next move for the SARB will be to cut interest rates.
Consumer Price Inflation
Stats SA published the latest consumer price inflation figures for July, indicating that headline CPI dropped to 4.74% for that month, significantly lower than the 5.3% recorded in May and well below market expectations of around 5%.
The lower figure puts CPI in the centre of the SARB’s target band of 3% to 6% and marks the fourth month of disinflation since March of this year and the lowest point in two years.
Since the SARB’s MPC began the rate hike cycle in November 2021, they have maintained that interest rates would continue to rise as long as inflation remained stubbornly high – only a sustained downward trend in CPI would shift policy in this regard.
This means that the downward trajectory of inflation seen this year is positive news for interest rates and is likely to result in the MPC delivering another hold at their September meeting.
In a Reuters poll of 20 economists conducted recently, 85% of respondents predicted that the repo rate would be kept steady at 8.25% at September’s meeting, and 80% concurred that there would be no change again in November.
Most economists also agree that the Reserve Bank will start implementing rate cuts, with a cut of 25 basis points expected as early as January or March 2024 and again every subsequent quarter of next year.
Easing inflation and potentially flat to lower interest rates would spell good news for South African households, although upside risks remain – particularly around fuel and food prices and the impact of changing climate conditions due to El Nino.
While headline CPI has dropped, food inflation has remained high at 9.9% in July, exacerbated by high fuel prices – although this was a decrease from 11% in June.
The 2024 Rate Cuts Outlook for South Africans
Moderating inflation, expected interest rate cuts of 125 basis points, and increased electricity supply should drive an improvement in confidence, demand, and investment in 2024, with real GDP growth projected to be at 1.4% for the year and closer to 2% in the medium term.
These factors are reasons for ordinary South Africans to allow themselves a measure of optimism amidst the doom and gloom of loadshedding and its negative effects on our everyday lives and economy, high food prices, and skyrocketing prices at the fuel pump.
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