Unchanged repo rate a fatal double punch for consumers

The unchanged repo rate coupled with the upcoming 0.5% VAT increase is a double blow for consumers who are battling high debt levels as well as high prices and income that does not keep up with inflation.

Another 0.5% VAT increase is also coming next year, all but extinguishing any hope of financial relief for struggling consumers.

Neil Roets, CEO of Debt Rescue, warns that this fatal double punch by the government will decimate the lives of millions of citizens who are sinking deeper into a sense of hopelessness with each financial blow.

“Even a small rate cut would have kept a glimmer of hope alive among embattled consumers who are desperate to dig themselves out of their financial abyss and are drowning in debt as a result of exorbitantly high interest rates,” Roets said.

“The additional burden of a VAT increase, no matter how small, on the majority of citizens, who are already grappling with high levels of unemployment and rising costs of essential goods, will take the nation to the point of no return.”

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Not adjusting tax brackets also adds to financial stress

He says it is equally concerning that the government opted not to adjust personal income tax brackets in line with inflation in the budget , as this effectively increases the tax burden on individuals, as salaries grow but tax thresholds remain unchanged.

“This, combined with the 12.7% electricity tariff hike that kicks in on 1 April, will heighten rge financial strain and deepen the debt crisis among consumers.”

Before the repo rate announcement on Thursday, Investec chief economist Annabel Bishop pointed out that the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) already indicated it was likely to pause cutting the repo rate at the March meeting as its last statement in January indicated a growing uncertainty around its forecasts and a developing wait-and-see attitude.

In addition, she pointed out that the US’ monetary policy stance is one of the key external factors that influence the MPC decision.

Roets says the rand/dollar exchange rate also remains a key factor in economic stability and would have influenced the decision. A weaker currency drives up import costs, particularly for essential goods such as fuel and food, exacerbating inflationary pressures.

In such a scenario the Sarb would be hesitant to lower interest rates prematurely, as its mandate includes safeguarding the rand’s value. This will be a critical consideration in future monetary policy decisions.

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No good news for repo rate and debt levels going forward

“Regardless of the global and domestic economic factors behind the decision, it will have a profound effect on taxpayers at a time when fluctuating inflation due to rising costs has significantly reduced consumers’ buying power, by decreasing the value of money, leading to a steep decline in the standard of living, especially among lower income families.”

Roets says it is unacceptable that hard working South African consumers continue to bear the brunt of the highest interest rates the country experienced in over a decade, along with the relentless increases in living costs, a water scarcity crisis that is rapidly escalating and food prices that place nourishing food out of reach of the most vulnerable.

South Africans increasingly have to tighten their belts as the average consumer spends 68% of their take-home pay on servicing debt. Total consumer debt in South Africa now sits at about R2.3 trillion, with more than half of made up of debt on home loans, according to the National Credit Regulator (NCR).

NCR data shows that consumers applying for loans and those in arrears reached a new high in the third quarter of 2024. In particular, mortgage arrears increased to 6.9% of outstanding loans, while payments that are between one and three months overdue also remained elevated.

Roets says one of the major factors that traps many citizens in a relentless debt cycle is the rising cost of credit due to existing debt which is most evident with big purchases such as home and car loans.