Rate hike will be tipping point for consumers - expert

Cape Town – A debt expert warned consumers on Tuesday to prepare for the worst as the rand’s rapid decline against the dollar will result in an interest rate hike at the end of the month.

Most analysts agree that the SA Reserve Bank's monetary policy committee (MPC) will likely increase the interest rate by 50 basis points to 6.75% on January 28 to stem the downward spiral of the rand, which weakened by about 25% against the dollar in 2015.

READ: Rand's uncontrolled drop to cause further rate hikes - analysts

The rand’s crash didn’t stop in the new year, with the unit falling to almost R18/$ at one point on Monday, although this was only a technical decline as it steadied at around R16.60/$.

The buck will stop with consumers, fresh from their spending-spree holidays, who will suddenly have less money to pay their bills.

“Consumers will need to prepare themselves and find other means to pay their monthly expenses as opposed to taking out loans,” said DebtBusters CEO Ian Wason on Tuesday.

“This is just the beginning of tougher financial times with 2016 poised to be a strain for consumers, especially those living on the breadline,” said Wason.

Middle- and upper-income earners should watch out for increased living expenses and factor these into their monthly household budgets, said Wason.

“These consumers have houses, cars and ample monetary commitments such as school fees and mobile contracts,” he said.

“An expected repo rate increase, coming on the back of the festive season spending spree and already maxed-out credit facilities, could be the tipping point for many South Africans, where they will no longer be able to service their financial commitments.”

He said South Africa’s poor economic growth, increases in commodity prices and US interest rate hikes will see the MPC raise the repo rate to compensate for the country’s economic downturn.

Wason sees the repo rate going up to 6.50% if the expected 25 basis-point hike is followed through.

“Expected hikes in the repo rate later this month coupled with electricity rate increases, water restriction penalties and food prices soaring as a result of the ongoing drought are just some of the financial risks facing South African families as they start the New Year,” he said.

Analysts from Standard Bank, Rand Merchant Bank and Nomura are expecting a 50 basis-point increase, which should cause even more alarm for indebted consumers.

DebtBusters' latest Q3 Debtometer Report reflects the current economic difficulty, which shows that clients require 102% of their net income to service their debt before paying for any living expenses.

According to the latest Consumer Bureau Monitor Report released by the National Credit Regulator, nearly 54% of South Africa’s credit active consumers are experiencing or have experienced financial problems with their accounts.  

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