Bigger rate hike impacts negatively for home and vehicle owners

On Thursday, the South African Reserve Bank (Sarb) announced a bigger-than-expected 50 basis points (bps) increase in the repo rate, taking it to 7.75% and pushing the prime lending rate of commercial banks to 11.25%. This is the ninth hike since the Sarb began its fight against stubbornly high inflation at the end of 2021, resulting in a combined 425bps increase from a Covid-era record low of 3.5%.

The Sarb’s latest move will put further pressure on homeowners and vehicle owners, as the cost of financing rises immediately. The cumulative effect of these increases has already impacted household spending, making it more burdensome for those servicing debt.

Professor Andre Roux, an economist at Stellenbosch Business School, warned that consumers are reaching the end of their tolerance levels, particularly as many are facing high personal debt burdens. He also highlighted rising food prices and chronic unemployment, adding that the country is on the verge of a recession.

The impact of these rate hikes is particularly evident in the housing market. For instance, on a 20-year R2 million bond, consumers will now pay R20,985 at the new prime rate of 11.25%, compared to R15,506 before the Sarb began its hiking cycle when the prime rate was 7%.

Lebogang Gaoaketse, the marketing and communication head at WesBank, expects that rising interest rates and inflation, coupled with other economic factors, will likely lead to potential car buyers postponing new vehicle purchases. Alternatively, they may choose to buy down or exit the new car market altogether in favour of better value in the used car market.

As an example, assuming an entry-level vehicle costs R250,000 and is financed over 72 months at an interest rate of 10.75%, the instalment amount prior to the latest announcement would have been R4,818.40. Purchasing the same vehicle at the hiked interest rate of 11.25% will result in a monthly repayment of R4,882.73.

Professor Roux believes that the Sarb imposed a “big bang” increase in order to err on the side of being hawkish, which would allow it to be more relaxed in future monetary policy meetings. He expects a pause in the rate-hiking cycle, but only if the Sarb can bring inflation down to around 6%.

In conclusion, the Sarb’s rate hike has brought gloom for South African homeowners and vehicle owners, adding pressure on their finances. The cumulative effect of these increases has made it more burdensome to service debt, particularly for those with personal debt burdens. The impact is particularly evident in the housing and vehicle markets, as the cost of financing immediately rises.