'Pause' expected on interest rate hikes

While economists expect the central bank to pause on interest rate hikes this week, the longer rates remain high, the more they affect consumers and businesses — and banks are making provision for this, said Banking Association South Africa MD Bongi Kunene this week.

Kunene told Business Times that while interest rate increases helped banks generate more returns, a longer, continued rate-hiking cycle will begin to have an effect on borrowers and, therefore, banks.

She said the more that options shrink for consumers in terms of how they use their income, the more difficult they find it even to service the loans they have with banks, and a prolonged high-interest environment will have a similar effect on businesses. 

“For businesses to survive, the most important item is cash flow. So, if they are not generating cash for their businesses, the loans they are taking from the banks, whether an advance or an overdraft, whether it is a credit card, whether it is leases, they are affected. This bites everybody, consumers and businesses alike.”

Kunene said interest rate levels were causing concern for banks about the ability of borrowers to repay, and they are raising provisions for that. Provisions are standard accounting practices when banks expect that there will be defaults on loans.

“In the next reporting cycle, it is very possible that we will see provisioning numbers increasing if banks are expecting that consumers and businesses are going to have a difficult time honouring their commitments.”

She added: “Eventually, yes, the high interest rate environment will have an effect on the profitability of banks, but the most important item for a bank's profitability is how vibrant our economy is. We now have an economy that has been sluggish for a long time. The economy has been growing between 0% and 1% for a very long time.”

Already there is evidence of distress borrowing among households. The financial vulnerability of consumers has increased while salary and wage increases are well below inflation

—  Annabel Bishop

In terms of loans, Kunene said, a total of R5.1-trillion bank assets are loans to finance homes, business and consumption, which contribute to the expansion of the economy. Mortgages account for 43% of the total while loans and advances to businesses account for 32%.

She said after taking a loan, some businesses will still resort to monthly bridging finance, usually at the overdraft rate of 7%.

 The Reserve Bank’s monetary policy committee (MPC) has hiked rates by 475 basis points to 8.25% since it began tightening monetary policy in November 2021, including a surprise 50bp in May amid concerns that inflation was still too high.

Economists, however, are expecting the MPC to either pause on hiking the repo rate or raise it just 25bp when it meets on Thursday. Nedbank economist Isaac Matshego expects a 25bp hike.

“It will be the last one, but Fed movements will remain key,” he said in reference to the US Federal Reserve's decision to pause rates in June after more than a year of hikes due to inflationary pressures.

Investec chief economist Annabel Bishop said with the Fed pausing rates, and inflation easing, the MPC will likely hold rates when they meet next week. The Bank needed at least a pause in its rate hike cycle to assess the effect on both inflation and the economy.

“Already, there is evidence of distress borrowing among households. The financial vulnerability of consumers has increased while salary and wage increases are well below inflation in South Africa, the last in particular having a suppressing effect on consumer demand and so on demand-led inflation.” 

Raymond Parsons, a professor at the North West University's Business School, said if benign inflation trends continued, there could be a case for the MPC to consider a “hawkish pause” at its meeting on Thursday. 

He said there are now fresh cross-currents for the MPC to weigh in deciding whether to raise interest rates by, say, another cautionary 25bp, or whether to pause and take stock of the overall situation.

“If the MPC is indeed committed to ‘flexible inflation targeting’, its next meeting will be a timely test of this undertaking,” said Parsons.