Archive photo for illustration purposes only. (Photo: Aaron Lefler/Unsplash)
The Reserve Bank’s latest interest rate increase, the first since May 2023, is a disappointment for consumers and comes at a time when debt-laden consumers have only just begun to breathe.
Benay Sager, CEO of the debt counselor DebtBusters, says that in the first quarter of the year debt-laden consumers experienced slight relief after several consecutive interest rate cuts and more money in their pockets due to withdrawals from retirement savings that are permissible under the two-pot retirement system.
DebtBusters’ debt index for the first quarter shows those who applied for debt counseling needed 64% of the money they take home at the end of the month to service their debt. This is better than the peak of 73% in the first quarter of 2021, but still high.
He says the interest in debt counseling was also more muted.
It’s encouraging that subscriptions to use their online debt management tool have increased by 23% in the past year, but it also shows that consumers are still experiencing underlying financial stress.
Nfromg expect interest rate increases
On Thursday, the monetary policy committee raised the repo rate by 25 basis points to 7%, bringing the prime lending rate – at which consumers borrow from banks – to 10.5%.
Sager says the geopolitical uncertainty in the world puts pressure on inflation, systematically pushes up the cost of living and brings renewed pressure on consumers. Consumers should prepare for more interest rate hikes.
The inflation rate rose to 4% in April compared to March’s 3.1%.
Lesetja Kganyago, president of the Reserve Bank (SARB), said during the interest rate announcement that the bank had lowered its growth outlook for the next two years.
“Before the current shock, the economy gained momentum with data that was largely positive. However, now we are dealing with a painful combination of greater global uncertainty and lower disposable income. This will hit investment and household spending, which are the biggest drivers of growth.”
Rhys Dyer, CEO of mortgage broker Ooba, says the increase is disappointing for consumers.
“This brings additional pressure on consumers who are already suffering, but was largely to be expected due to rising fuel prices, and higher municipal and electricity rates which push up inflation.”
Dyer says the pressure on consumers can be seen, among other things, in the deposits that home buyers pay. The actual value of deposits paid by home buyers has decreased by more than 14% compared to a year ago.
He emphasized that it is also lower, because banks offer more support to home buyers and affordability looks better. “Financial institutions offer better financing packages such as mortgage loans that require no deposit and loans of more than 100% that include all costs.”
The ooba group’s data shows that first home buyers largely use loans that include all costs, while many existing home owners, who are buying a next property, choose loans with a zero deposit.
(Photo: FreePik)
Practical advice for stretching disposable income
Sager says that although the increase of 25 basis points will not cost mortgage holders thousands of rands extra per month, it is nevertheless sensitive, especially in light of other price increases.
He believes that now is the ideal time for consumers to create room for themselves in their budgets, before interest rates rise further.
DebtBusters’ data shows consumers still rely heavily on unsecured debt such as credit card debt to meet their obligations. The average level of unsecured debt is now 23% higher than in 2021.
In the first quarter of 2026, 96% of consumers who applied for debt counseling had a personal loan and the average number of credit agreements per applicant is at 8.5 the highest since 2017.
People who take home more than R50 000 per month have a debt to income ratio of 303%, which is the highest of all income groups.
Sager says almost all consumers spend about 10% of their disposable income on transportation, about 9% on utilities and almost 4% on cell phone costs.
In practice, consumers should take a fresh look at their package contracts and subscriptions that may have been entered into years ago, but their circumstances have changed in the meantime and they may no longer need such large packages, he says.
Consumers are also likely to cut back on entertainment subscriptions or scale back on the paid options of artificial intelligence tools. At the same time, consumers can review their bank account options and associated bank charges and switch to account packages with lower or no charges.
“See where you can save, but don’t neglect to make your home mortgage and car repayments. People will be surprised where they can save anywhere.”
Contain the specter of inflation
Prof. Raymond Parsons, economist attached to the North-West University’s business school, says the majority decision of the monetary policy committee to raise the interest rate now is a preventive measure, even though there is not yet clear data on the second-round effect of increases such as higher inflation expectations.
Yet lending costs are rising for businesses and consumers who already find themselves in an environment with sluggish economic growth, he says.
Adriaan Pask, chief investment officer of PSG Wealth, explained that the SARB had to find a balance between the protection of vulnerable consumers and a weak economy on the one hand, and a timely interest rate increase to prevent inflation expectations from being embedded. When this happens and consumers and businesses expect price increases to continue, they adjust their behavior accordingly.
Higher inflation expectations then become part of higher wage demands, setting prices and investor sentiment. Once that happens, the cost of restoring credibility in lower inflation rises.
Pask said that in theory, rising interest rates are the response to higher inflation, because they keep demand in check. By raising the cost of debt, policymakers suppress spending in the economy and help contain price pressures.
“But if higher fuel, electricity, logistics and other administered prices or imported costs push up inflation, interest rate increases do not solve the core of the problem. They may suppress demand, but not directly lower oil prices or remove structural bottlenecks in the local economy.”
If the inflation risks are not addressed early enough, the danger arises that medium to longer term inflation settles at higher levels, he warned.