South African households are facing another financial setback after the South African Reserve Bank raised the repo rate by 25-basis-points (bps) to 7.25%, with debt repayment costs set to increase at a time when consumers are already battling rising living expenses.
The decision, announced by Reserve Bank Governor Lesetja Kganyago on Wednesday, takes the prime lending rate from 10.50% to 10.75%.
The increase means consumers with variable rate home loans, vehicle finance and other interest bearing debt will face higher monthly repayments.
Debt Rescue CEO Neil Roets said the latest increase was another significant blow for households already under severe financial pressure.
"We at Debt Rescue are particularly concerned about the cumulative impact on consumers, because this increase comes at a time when household budgets are already being squeezed by elevated transport, housing, utilities and other essential living costs," Roets said.
Roets added that for many households, even a relatively small increase in borrowing costs can have a meaningful impact because there is little room left in monthly budgets to absorb additional expenses.
The inflation outlook is adding to those concerns, with the Reserve Bank expecting headline inflation to rise above 5% later this year and into early 2027, largely because of renewed fuel price pressures.
Kganyago said the central bank had raised its near term inflation forecasts because of higher fuel prices, with an average fuel price under recovery of R2.83 per litre.
"Headline inflation will likely be above 5% later this year and early next year, before slowing as the fuel shock recedes. We currently expect inflation to be back around 3% towards the end of 2027," Kganyago said.
He said food inflation was currently at its lowest level since 2010, supported by strong harvests and a levelling off in meat prices following the outbreak of foot and mouth disease.
However, the broader global environment remains a concern.
"The global economic environment remains challenging and uncertain. Since our last meeting, the Middle East conflict has escalated further. Not much oil is getting through the Strait of Hormuz. Meanwhile, oil exports from Saudi Arabia are being interrupted by fighting in Yemen," Kganyago said.
He added that the Russia Ukraine war was continuing to affect refinery capacity and food exports through the Black Sea.
"These geopolitical events add up to a large, negative and persistent global supply shock, creating additional inflationary pressures," Kganyago said.
Household debt under pressure
Roets said the key concern was not simply the latest rate increase, but its cumulative impact on household finances.
"When debt repayments and essential living costs absorb an increasing share of disposable income, consumers can become increasingly reliant on credit simply to bridge monthly shortfalls. That is one of the clearest warning signs of escalating financial distress," he said.
The latest Eighty20 Credit Stress Report showed that 41.8% of credit active South Africans are in default on at least one loan.
Roets said Debt Rescue's own June survey found that 48.5% of respondents did not know how they would cope financially with another interest rate increase.
The latest increase therefore comes against a backdrop of already elevated financial stress, while South Africa's economy contracted by 0.2% in the second quarter.
Despite the contraction, the Reserve Bank continues to expect a rebound in economic growth, with annual growth projected at 1.2%.
Why the Reserve Bank raised rates
KPMG lead economist Frank Blackmore said geopolitical tensions and the resulting energy supply shocks were among the main factors behind the Reserve Bank's decision.
Blackmore said these supply shocks could create second round effects, where higher prices begin feeding into wage demands and broader inflation.
"The supply shocks will be responsible for second round effects, meaning, besides the direct effect of an increase in prices, it starts to enter labour markets through inflation and that becomes more persistent," Blackmore said.
He said inflation expectations remained above the Reserve Bank's target and that the rate increase was intended to reduce the risk of inflation becoming more entrenched.
"The best way to contain inflation is to change inflation expectations which are still noticeably higher than the bank's target rate," Blackmore said.
He said inflation expectations were just above 4%, compared with the Reserve Bank's 3% target.
"The increase in the rates at this point in time will try to decrease the risk in second round effects moving through the economy," Blackmore said.
He added that the Reserve Bank had emphasised that it would continue to act appropriately to bring inflation under control and protect the value of the rand.
Growth faces renewed pressure
While the rate increase is aimed at containing inflation, higher borrowing costs could place further pressure on consumer spending and economic activity.
Kganyago said the central bank still expected GDP growth of 1.2% this year despite the second quarter contraction.
For households, however, the immediate impact will be felt through higher monthly debt repayments.
Roets said consumers were already balancing higher transport, housing, utility and other essential costs, leaving many households with limited financial flexibility.
"For consumers, today's decision therefore means more than a change in the policy rate. It means another increase in the monthly financial burden at a time when many households are already struggling to keep debt repayments and essential living expenses in balance," Roets said.
The Reserve Bank's decision was unanimous, with the 25 bps increase taking effect from 25 September.
For indebted households, the latest move means that careful budgeting will become even more important as higher borrowing costs coincide with renewed fuel price pressure and an uncertain economic outlook.
ashley.lechman@nationalmg.co.za