Governor of the South African Reserve Bank (SARB), Lesetja Kganyago, shocked market participants by announcing a higher-than-anticipated 50-basis-point hike on the 30th of March, the date of the second MPC meeting of 2023. In the days leading up to the announcement, general market consensus estimates indicated a 25-basis-point hike. This decision raises the repo rate to 7.75% and the prime rate to 11.2%, the highest levels since 2009, respectively (Trive, 2023).
In recent years, interest rates have reached all-time lows, making it easier and less expensive to borrow money while reducing the returns on savings and investments. However, the South African Reserve Bank (SARB) recently announced a 50 basis point (bps) increase in interest rates, which has sparked speculation regarding the impact on customers’ disposable income and their investment and retirement contributions.
A 50 basis point increase in interest rates results in a 0.5% increase in the cost of borrowing money. For instance, if a client has an R1 million mortgage with a 10% interest rate, their monthly payments would be approximately R9,650. However, a 50 basis point increase in interest rates would increase the interest rate to 10.50% and the monthly payments to approximately R9,920. Customers would be required to pay a higher interest rate on their loans, including personal loans, vehicle loans, and mortgages.
The effect on discretionary income
As the cost of borrowing money rises, customers’ disposable income will decrease because they will have to devote a greater portion of their earnings to loan repayments. A customer with a monthly mortgage payment of R10,000 and a monthly income of R20,000 would have R10,000 in disposable income. However, a 50 basis point increase in interest rates would increase their monthly mortgage payment to R10,200, reducing their monthly disposable income to R9,800.
This decrease in discretionary income can have a substantial impact on consumers’ capacity to save and invest. Customers may have to reduce their spending to accommodate the increase in loan payments, reducing their ability to save or invest. In addition, customers may be compelled to prioritise debt repayment over savings and investments, thereby decreasing their contributions to these areas.
The effect on investments and savings for retirement
The impact of a 50 basis point increase in interest rates on customers’ investments and retirement savings is also possible. As financial institutions offer higher interest rates to attract customers, the returns on investments and savings may also increase as the cost of borrowing rises. However, the effect on returns may not be immediate, as it may take financial institutions time to adjust their interest rates.
Customers with investments in fixed income securities, such as bonds or fixed deposit accounts, may benefit from an increase in interest rates, as the returns on these investments may rise. Customers with investments in equities, however, may be negatively impacted, as higher interest rates may reduce consumer spending, resulting in lower company profits and lower stock prices.
Contributing customers to retirement funds may also be affected by a 50 basis point increase in interest rates. Funds for retirement may invest in fixed-income securities, which may profit from a rise in interest rates. However, the effect on retirement funds may also depend on the fund’s type and holdings.
Customers with high levels of debt and low levels of savings would be the most susceptible to an interest rate increase of 50 basis points. These clients may struggle to make ends meet, and they may have to prioritise debt repayment over savings and investments. Additionally, customers with adjustable-rate loans, such as adjustable-rate mortgages, may be more susceptible to interest rate increases, as their loan repayments may increase with each rate increase.
In conclusion, a 50 basis point increase in interest rates can have substantial effects on the disposable income, investments, and retirement savings of customers. Although it may appear to be a small increase, it can accumulate over time and have an impact on long-term financial goals. Customers should evaluate their financial situation and adjust their investment and budgeting strategies accordingly. This may involve obtaining professional financial advice, re-evaluating their investment portfolios, and considering alternative investment opportunities, such as high-yield savings accounts or bonds.
Customers should be aware that interest rate increases are a normal part of the economic cycle, and they should prepare accordingly. Customers can weather the impact of interest rate hikes and continue to pursue their financial objectives if they are proactive and make the necessary adjustments to their finances.
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