Repo rate down, but debt trap continues for SA consumers

THE START of 2025 has been a see-saw for South African consumers, with fuel prices increasing for the first two months, while the South African Reserve Bank (SARB) announced a cut in interest rates this week.

SARB Governor Lesetja Kganyago on Thursday announced that the central bank will cut the repo rate by 25 basis points, meaning rates will drop by 0.25%.

The repo rate will come down from 7.75% to 7.50% while the prime lending rate decreases from 11.25% to 11%.

Kganyago said during his address, “At our last meeting, we warned about a more challenging global environment. Some of the risks we saw then have since materialised. In particular, the outlook for monetary policy in the United States has changed. The space for rate cuts by the Federal Reserve now looks limited, with core inflation still elevated, and new inflation risks emerging such as rising trade tariffs. It is even possible that US rates could go up again, to stabilise inflation.

“South Africa’s economy contracted in the third quarter. This was mostly due to an unusually large drop in agricultural production, which has limited implications for how we interpret the economy’s underlying growth trend.

“For the fourth quarter, we anticipate a rebound. This will be supported by more normal agricultural production, as well as strong household spending, given tailwinds including lower inflation and Two-Pot pension withdrawals,“ the governor said while speaking about the economy.

Frank Blackmore, the lead economist at KPMG, said that the uncertainty regarding the global economy was one of the main factors for the Monetary Policy Committee’s (MPC) cautious approach to the repo rate.

Blackmore said, “The SARB’s MPC decided to reduce the repo rate by 25 basis points. The governor emphasised that there was no debate over a larger rate cut, and 50 basis points therefore were never considered this time even though the October inflation came out below the target range at 2.8%.”

“The reason that the governor put for this is that there is a lot of uncertainty around the global economy, and that uncertainty is a risk that requires a cautious approach. We've seen large appreciations in the rand after the US elections, and next year the Reserve Bank has pulled in increases in electricity, water, and food prices, all of which are putting upward pressure on inflation in future and therefore, in his words, justify a cautious approach,” he said.

“Saying that, we have now reduced from the highs of 8.25% to the current rate of 7.50% leaving the prime interest rate at 11% and this trend is going to continue into 2025 and will be data dependent as it was emphasised by the bank itself,” Blackmore added.

Meanwhile, Neil Roets, the CEO of Debt Rescue, said the reality of the slow pace of the country’s rate reductions is perpetuating the debt trap that millions of ordinary South Africans find themselves in.

“Statistics reflect that the inflation rate remained below the midpoint of the SARB’s inflation range of 3% to 6% for the fifth consecutive month in December 2024, and that it has stayed within the range for the last 19 months,” Roets said.

“Simply put, this means that the cost of living is increasing at a slower pace – however, this has no bearing on consumers right now, with the exorbitant prices for most foods and other livings costs continuing to put unbearable financial strain on households,” Roets further added.

Consistently high interest rates have made it increasingly difficult for borrowers to meet their loan obligations, and residential mortgage defaults have risen strongly over the past two years, while elevated interest rates have ensured that just below 10% of all household disposable income is spent on servicing debt, according to the SARB’s latest financial stability review.

“Even though consumer spending increased somewhat in the fourth quarter of 2024, there is still a sense of hopelessness that pervades among millions of desperate consumers who are sliding deeper and deeper into debt to keep their families afloat – and it is intensifying with the passing of each month. This scenario has been escalating since the prolonged tightening cycle began towards the end of 2021. While any interest rate reduction will bring some relief to the country and the economy, the sluggish pace of rate cuts projected for 2025 will simply perpetuate the ongoing challenges that households have faced over the past four years,” Roets said.

“One of the major factors that traps many citizens in a relentless debt cycle is the rising cost of credit due to existing debt. My advice to those who cannot break free from their financial constraints is to seek help from a registered debt counsellor who can assist them to manage their financial predicament. This has been a very successful solution for thousands of consumers who are plagued by over-indebtedness,” Roets added.

– BUSINESS REPORT