Rate hiking has done a lot of good for the consumer, but perhaps now its time to pause

The SARB’s 2-year move to “normalise” interest rates upward was appropriate and well-executed. But for the time being, from the Household/Consumer’s point of view, the policy action is probably sufficient.

• SARB expected to keep interest rates unchanged this week. FNB believes it is near to the having completed its “upward normalization” of interest rates, with only one more 25 basis point hike expected late in 2016.

• The gradual lifting of interest rates since 2014 has done a lot of good for the household/consumer in the longer run. Although having caused a mild increase in financial pressure on the consumer in the short run, it has contained household credit growth at levels low enough for the Household Debt-to-Disposable Income Ratio to continue its declining trend. Lower indebtedness is crucial in reducing Household Sector vulnerability in the longer run.

• The slow and moderate rate hiking cycle has also kept the housing market from becoming “over-exuberant” again, thus keeping the market largely away from another potential “market over-shoot” caused by unhealthy speculation, too much buy-to-let investment or 1st time buyer panic.

• Current interest rate levels are probably not yet sufficient in terms of promoting an adequate savings rate, so although showing early signs of improvement, the household savings rate remains dismal.

• However, although the savings rate has not yet been addressed, with consumer confidence now very weak, and a more noticeable increase in household financial stress becoming apparent early in 2016, it is probably appropriate for the SARB to pause on rates.


This week sees the Monetary Policy Committee (MPC) of the Reserve Bank (SARB) meet to deliberate on interest rates, the decision to be announced on Thursday 21 July. Against the backdrop of almost recessionary conditions in the economy, and CPI (Consumer Price Index) inflation having slowed mildly from a 7% year-on-year high in February to 6.1% by May. While this isn’t quite back in the SARB’s 3-6% target range yet, it has been moving in the right direction, and that may just be sufficient for the SARB to pause on its interest rate hiking.

FNB expects one further Repo Rate hike of 25 basis points later this year, where-after FNB expects the SARB to end its latest round of hiking, and for rates to move sideways over the next few years. The Bank had indicated earlier in the rate hiking cycle that it wished to “normalize” interest rates, and with the Repo Rate now positive in real terms, the job is probably not far from done.

• Gradual rate hiking since 2014 has sustained the healthy declining trend in the Household Debt-to-Disposable Income Ratio

The gradual lifting of interest rates back to healthier positive real levels was desirable, and FNB believes it has done a lot of good for the consumer. Those who are repaying debt may not think so, but the good has been done in terms of constraining the growth in new credit. After the Household Sector’s Debt-to-Disposable Income Ratio peaked at an all time high of 87.8% early in 2008, the consumer was vulnerable and the financial pain was felt when interest rates peaked at a Prime Rate of 15.5% in June of that year. That indebtedness level, one felt, was a bridge too far, and it was crucial that the Debt-to-Disposable Income Ratio be reduced.

Initially, from 2008 onward, the lagged impact of the previous interest rate hiking cycle to mid-2008 was seen in a steady reduction in this Debt Ratio. However, from around 2011 this declining trend began to “stutter”, making slow progress thereafter. We are of the opinion that had the SARB not begun to lift interest rates from January 2014, by now we may well have had credit growth strong enough to lift that Debt-to-Disposable Income Ratio once more. Instead, that gradual rate hiking cycle kept the Debt-to-Disposable Income Ratio declining slowly, to reach a healthier 76.6% by the 1st Quarter of 2016.

• Rate hiking has also been good in terms of keeping “over-exuberance” away from the housing market

The rate hiking also kept the housing market safe from any “over-exuberant” behavior by keeping lending rates well above house price growth, and average house price growth by and large in single-digits (apart from the Western Cape recently). This was crucial in support of the move towards a lower Household Debt-to-Disposable Income Ratio, because over-exuberance in the housing market can quickly lead to a buy-to-let and speculative buying spree which uses cheap credit for funding.

• The slow pace of rate hiking has minimized the financial pressure on the Household Sector, but financial pressure has risen mildly nevertheless

Therefore, the SARB has kept the household mortgage and consumer credit market behaving by slowly hiking rates. At the same time, however, it was important that the hiking take place slowly, which it did, so as not to cause any severe financial pain to what remains a fragile (and still highly indebted despite the improvement to date) Household Sector.

It was inevitable, though, that there would be some impact on consumer credit health, and early in 2016, 2 years after rate hiking started, FNB began to see more noticeable deterioration in a variety of indicators related to credit health and financial stress.

The TransUnion Consumer Credit Index slipped to below the crucial 50 level, which signals the start of deterioration in consumer credit health. The TPN rental data showed its most noticeable decline in the percentage of residential rental tenants in good standing with their rental payments in some years. And Household Mortgage Arrears started to rise noticeably in the NCR data.

In FNB’s own residential market data, the estimated percentage of sellers selling to downscale due to financial pressure was mildly elevated from 2015 lows, too.

These indications that household financial stress is on the rise now probably make it desirable, from a household point of view, for the SARB to begin to “hold fire”. Certainly, the FNB-BER Consumer Confidence Index points to very weak consumer confidence, and slowing Real Household Disposable Income continues to take Real Household Consumption Expenditure slower.

Therefore, FNB thinks that the SARB has just about done enough from a Household Sector point of view for the time being. There is unfinished business, as they believe that the Debt-to-Disposable Income needs to come down further, but a lack of consumer confidence in a weak economy is now expected to sustain the declining trend without further rate hiking.

• Savings remains weak though, but resolving that problem may just have to wait a while

The other unfinished business is with regard to the country’s dismal household savings rate, still languishing in net dissavings territory. Recently, the rate of dis-saving has begun to diminish, but the savings rate remains dire. Ultimately, South Africa may need higher interest rates to meaningfully improve this situation. However, right now would probably not be a desirable time to push that agenda.

Monetary policy is all a balancing act, and although CPI inflation is actually the SARB’s main targeted variable, FNB believes that the SARB has been doing a sterling job from a Household Sector financial point of view too, keeping indebtedness on the decline, but at the same time not causing severe financial pain. The slow lifting of rates has been commendable. But a pause may now be appropriate in a very tough economic period.

Read more here: Household Sector_MPC_Week_July_2016