SA could experience a technical recession if interest rates remain high

The country could experience a technical recession if the South African Reserve Bank (Sarb) continues to keep interest rates higher than what is required.

This stark prediction is according to economists at First National Bank (FNB) and in their latest Economic Weekly Report.

The report further highlighted that SA consumers are facing immense financial stress and the high interest rates are exacerbating this issue.

“Prolonging rate cuts beyond necessity, particularly when broader financial conditions are already restrictive, could further stifle growth and heighten the likelihood of a technical recession,” the report said.

The Sarb began hiking the interest rate in November 2021 and since the start of this cycle, the rate has increased cumulatively by 475 basis points (bps).

In late March, Governor Lesetja Kganyago said the repo rate will remain at 8.25%, while the prime lending rate also stays at 11.75%.

Impact on consumers

FNB said that the interest rate increases have noticeably affected the portion of household income allocated to servicing debt, rising from an annualised nominal R312 billion in the fourth quarter of 2019 to R411 billion in the final quarter of 2023.

“Inflation remains persistent, recently rising to 5.6% year on year (YoY) in February after averaging 5.9% in 2023, surpassing wage income growth of 5.6% in the same year”.

South African consumers have therefore reduced the amount of credit facilities they are taking.

Demand, particularly that associated with interest rate-sensitive spending, has weakened, and reflects a strained consumer, the report said.

Interest rates could be cut in July

South Africans could see some relief as interest rates could come down by July. This is according to Mpho Molopyane, the chief economist at Alexforbes.

In the 2023 Alexforbes Manager Watch Annual Survey, Molopyane said that South Africa inflation figures are slowly coming to the midpoint of the Reserve Bank’s 3% to 6% target range.

Molopyane said the 2024 economic outlook for SA has improved due to reduced load shedding and increased self-generation capacity.

The Sarb would possibly cut interest rates by the second half of the year, beginning in July. Alexforbes argued that the decline in inflation would allow the bank to cut the repo rate by 75bps by July 2024.

The SARB could also cut the interest rate by a further 50bps next year.

How does the interest rates impact your home loan?

If Molopyane is correct and the Sarb decides to cut interest rate in July then this will help consumers, especially those with bond repayments.

Here is a breakdown of how a home payment could go down if the interest rate is cut.

If you are paying off a R1 million home loan, your monthly bond repayment is currently about R10,837 a month at the current prime lending rate of 11.75%.

If the Reserve Bank were to decrease the lending rate by 25bps to 11.5%, then your bond payment would be R10,664.

If SA gets a 50bps cut, your bond repayment would be R10,493.

A 75 basis points cut would see your bond payment drop to R10,322 and a 100 basis points cut would mean your bond payment would be R10,152.

These calculations are based on a 20-year bond repayment plan.

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