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Economists decry interest rate increase: 'It’s always the poor who bear the brunt'

Economists and business warned that the latest increase by the South African Reserve Bank (SARB) would have dire consequences for consumers. Picture: Henk Kruger/African News Agency(ANA)

Economists and business warned that the latest increase by the South African Reserve Bank (SARB) would have dire consequences for consumers. Picture: Henk Kruger/African News Agency(ANA)

Published Jan 28, 2022

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Cape Town - Consumers should brace themselves for a series of interest rate hikes this year, which started with Thursday’s 25 basis points increase which pushed the repo rate to 4%.

Economists and business warned that the latest increase by the South African Reserve Bank (SARB) would have dire consequences for consumers who were already struggling with high petrol, electricity and grocery prices.

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The decision follows the conclusion of the SARB’s first monetary policy committee (MPC) meeting of 2022 and the announcement by the bank governor Lesetja Kganyago, on Thursday on the back of spiking inflation locally and internationally.

Economists said an increased repo rate would mean an increased cost of living, especially for South Africans who are paying bonds.

SA Institute of Race Relations chief executive John Endres said interest rate hikes were a double-edged sword, they were good for savers and pensioners who relied on savings, because they earn more interest when rates are higher.

Endres said but on the other hand higher interest rates make life more difficult for people who have borrowed money, because now they'll be paying more on their credit.

“The rise in oil, petrol and electricity prices is determined less by interest rates and more by other factors, such as global energy prices and Eskom's attempts to cover its costs and pay its debt,” said Endres.

Political analyst at the Xubera Institute for Research and Development, Xolani Dube, said: “We have to understand in SA, there is nothing that protects the poor, there is no firewall that protects the poor, and people who pay more are the poor paying on behalf of the rich.”

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Dube said at the end of the day, whatever that is happening in the economy, the people who pay more are the poor, and even when the economy is improving, the economy only improves for the rich but the poor still bear the brunt of subsidising the poor.

Ayanda Ndimande, strategic business development manager: retail credit at Sanlam, said South Africans’ debt situation was getting worse, with the average debt-to-income ratio at an all-time high.

He said that was according to the latest Debt Index from DebtBusters for Q3 of 2021, which showed that the average debt-to-net-income ratio now stands at 116% across all income bands and 145% for those taking home more than R20 000.

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He said with consumers already relying heavily on debt to supplement their income before the pandemic, the current debt situation was unfortunately no surprise.

Ndimande said many consumers find themselves in a financial situation where their debt repayments are higher than their income.

“This is often due to unregulated lenders known as ’Mashonisas’ who extend loans without any affordability assessments. Many consumers are also financially responsible for their extended family and their income is insufficient to cover their needs and those of their dependants.”

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Cape Chamber of Commerce and Industry president Jacques Moolman said almost every business, large and small, either uses banks or borrows from banks.

Moolman said consequently any increase in the Reserve Bank lending rate would affect their costs, most of which they would pass on in the prices they charge for their services or products.

He said a higher bank rate would affect consumer-driven businesses and they would see a reduction in sales, further squeezing their under-pressure cash flow.

“In the long run a higher interest rate will moderate price increases and curb the inflation rate, making products and services less expensive for consumers,” he said.

He said given the amount of money the country spends on welfare, the salaries of an over-manned public service, and now Covid-19 countermeasures, monetary inflation is a very real prospect.

“Inflation is a tax on everyone with enormously negative effects on the economy. The bank lending rate is a means of controlling over-borrowing and is an attempt to control inflation. Without control of inflation, the economy will swiftly slide, with disastrous consequences to both business and the consumer.”

Bheki Mahlobo, an economist and senior analyst at the Centre for Risk Analysis, said with the recent Omicron variant wave there was more evidence that the virus was getting less fatal, leading to many countries around the world removing some of their Covid-19 restrictions, which is positive for global travel and economic growth.

“We see the same trend in SA in terms of fewer people dying from the virus. However, the country does not have any indications of substantive economic growth,” said Mahlobo.

He said employment figures had not recovered to their pre-pandemic levels and had been stagnant over the past 10 years while consumer and business sentiment was weak.

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