Increasing the interest rate is not the answer to suppress inflation and instead focus should be placed on larger problems such as load shedding to bring inflation under control.
“South Africa has bigger problems at this stage in the form of ongoing load shedding which has a tremendous impact on inflation, cost price inflation, transport costs and the general cost of living of consumers,” says Thys van Zyl, head of product development at Everest Wealth.
“If we cannot reduce load shedding’s impact on inflation, we will not be able to bring down stubborn inflation – even if the interest rate is raised three or four more times. The interest rate has been raised so many times over the past 16 months and it is clear that it is not working to curb inflation.”
The SA Reserve Bank’s monetary policy committee hiked interest rates by 50 basis points on Thursday while an increase of 25 basis points was expected. This was the ninth consecutive increase and the interest rate has already been increased by 425 basis points since November 2021.
“The Reserve Bank will definitely have to start looking at other options than just applying interest rate increases. Proactive thinking will have to be done to see how it can be made easier for cash-strapped consumers with the cost-of-living skyrocketing.”
The interest rate hikes mean that consumers must reach even deeper into their pockets with credit card and store debt becoming more expensive and personal loans and car and home payments rising.
Consumers who took on the debt when the interest rate was much lower may now struggle to service their debt or simply cannot afford it anymore. However, the average salary in the country does not increase at the same rate and makes South Africans increasingly poor.
According to Van Zyl, consumers must take proactive steps to protect themselves financially. “Try to build a buffer into your budget or have room to manoeuvre for unforeseen expenses such as sharp rises due to interest rate increases. Work smarter with debt and try to avoid short-term debt with higher rates as well as increasing debt. Instead, try to pay off debt faster and thus save interest. Cut bad habits or unnecessary expenses from your budget and try to invest that money instead.”
Interest rate increases affect investors positively and negatively. People with investments and money in the bank are positively affected by this, while an increase in interest rates is generally negative for stocks.
“With higher interest rates, everything becomes more expensive and this can result in people withdrawing more money from investments to keep up with rising living costs. In the midst of turbulent times, a financial advisor can advise clients on which strategies to follow and where to invest in order to meet unique expectations.”