South Africa’s high interest rates continue to pressurise the finances of households amid the ongoing restrictive monetary policy stance by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB).

The latest Altron FinTech Household Resilience Index (AFHRI) shows that, over the past two years, the country’s benchmark prime lending rate has been raised consistently to almost 12% – the highest level in 14 years.

“This has occurred even though both the producer price index and the consumer price index (CPI) are comfortably within the Reserve Bank’s target range for inflation of 3% to 6%, and no sign whatsoever of demand inflation in the economy,” said economist Dr Roelof Botha, who compiles the index on behalf of Altron FinTech.

“Arguably the most worrying trend in the latest AFHRI is the year-on-year decline of more than 11% in the ratio of household income to debt costs.”

Households are using 9% of their disposable incomes to pay debt costs, a 34% increase on the 6.7% in the fourth quarter of 2021.

“The inconsistency of monetary policy remains a point of huge concern for the millions of indebted households and businesses,” says Botha, adding that before the Covid-19 pandemic, the MPC was satisfied with a prime overdraft rate of 10%, with CPI within the inflation target range of 3% to 6%.

“Now, despite the absence of demand inflation, substantial unused production capacity and the CPI within the target range, the prime rate is 11.75% – a full 175 basis points higher. The standard of living of South African households will not be lifted unless interest rates decline to substantially lower levels – at the very least to the prime rate that existed at the beginning of 2020, namely 10%.”

The higher the SARB’s repo rate, and the linked prime overdraft rate, the higher the cost of credit and working capital, which negatively impacts the financial disposition of households.

Household and business credit play a crucially important role in the expansion of economic activity, and the economy has never been able to grow at sustained high levels in the absence of real growth in household credit extension, he said.

In real terms, the AFHRI shows that household credit extension remains lower than four years ago and is 4.2% lower than a decade ago.

While the 2023 fourth quarter AFHRI recorded a year-on-year increase of 1.4%, six of the 20 constituent indicators remained in negative territory, while another three, including household disposable income, recorded growth of less than 1%.

“It is concerning that the index value remains lower than in the fourth quarter of 2019 – the last comparable quarter before the pandemic. Since the inception of the AFHRI in the first quarter of 2014, the financial disposition of households has increased by a yearly average of only 1.2%, marginally higher than the paltry average yearly real growth of 1.1% in the country’s gross domestic product over this period.”

“All indicators, the AFRHI included, clearly paint a picture that to start assisting consumers, interest rates must be lowered. This is equally important in terms of growing the economy, attracting investment and reducing unemployment,” added Altron FinTech MD Johan Gellatly.

“Business South Africa is sitting on the sideline and playing a ‘wait-and-see game’ to ascertain whether they should invest or not owing to the tight monetary policy.”

Gellatly also believed that Altron FinTech remains well positioned to assist customers in growing market share in their chosen market by leveraging the company’s innovative payment platform solutions.

“At Altron FinTech, we are constantly applying our minds with our customers on how best we can use the resources at our disposal to grow our businesses and assist consumers by introducing cost-friendly products and services.”

Meanwhile, the latest AFHRI also recorded some positive trends, including a rise in private sector employment of almost 1.7-million, of which 243 000 were new jobs in the construction sector, since the third quarter of 2021, clear signs of renewed business confidence and increased private sector capital formation.

Further, following a lengthy period of decline, real levels of labour remuneration in the private sector picked up in 2023, with year-on-year growth of 1.6% in the fourth quarter.

Combined with sustained employment growth, these indicators represent the key reasons for the increase in the positive overall AFHRI trend.