A 25 basis point increase in the base interest rate will raise the lending ceiling rate from 10.5% to 10.75%, immediately increasing the cost of both new and existing floating-rate debts.
Many economists predict that the South African Reserve Bank will raise the repo rate by 25 basis points at its next Monetary Policy Committee (MPC) meeting, scheduled for September 23. However, this change has specific implications for debt holders.
For example, an individual purchasing a car worth R500,000 in early October and financing the full amount over six years at the ceiling rate, the monthly payment will increase from approximately R9,389 to R9,453. This is only a difference of R64 per month, but if the interest rate remains unchanged for the full six years, the buyer will repay about R680,600 instead of R676,000 at the current ceiling rate.
Thus, the quarter-percent increase adds approximately R4,600 to the total cost of the car. This difference becomes significantly larger when the debt is stretched over decades.
Consider a mortgage loan of R1.5 million over 20 years at the 10.75% ceiling rate: the monthly payment will be about R15,228, compared to R14,976 at the current 10.5% rate. If the rate remains at 10.75% for the entire term, the homeowner will ultimately pay about R3.65 million through the mortgage. Of this amount, approximately R2.15 million will be interest.
At the current ceiling rate, the same R1.5 million loan will cost approximately R3.59 million over 20 years, including R2.09 million in interest. This means that the quarter-percentage point difference, maintained throughout the term, increases the mortgage cost by approximately R60,700.
The calculations assume 100% financing at the ceiling rate, with no deposit or fees, and intentionally keep the interest rate constant to illustrate the effect of the 25 basis point difference. In reality, interest rates will fluctuate multiple times over the 20-year mortgage term, and individual borrowers may be offered rates higher or lower than the ceiling rate.
Probability of Rate Hike Increases
Investec Chief Economist Annabel Bishop expects the South African Reserve Bank to raise rates by 25 basis points next week, and financial markets are also pricing in a high probability of such an increase.
Bishop noted that the forward swap curve showed nearly an 85% chance of a 25 basis point hike, with a second increase fully accounted for by the end of the year. Rising oil prices have intensified inflation concerns, and the US Federal Reserve's decision on Wednesday to raise the target range by 25 basis points to 3.75% - 4% added another factor for the South African Reserve Bank.
Bishop stated: 'For South Africa, this outcome strengthens the likelihood of an interest rate hike at the Monetary Policy Committee meeting next week.'
Not So Quickly
However, PSG Senior Economist Johann Els still believes that the central bank will keep rates unchanged following the recent BER survey on inflation expectations, which showed stabilization or a decrease in expectations across several indicators.
Household expectations for inflation over the next 12 months have fallen from 6% to 4.9%, and the five-year expectation dropped from 9.1% to 8.3%. The overall BER professional five-year inflation expectation weakened from 4.1% to 4.0% in the third quarter.
Analysts forecast inflation of 3.4% in 2028 and 3.5% over five years. Union expectations are higher but declining: 4.1% for 2027, 3.9% for 2028, and 4.3% over five years.
Els noted that lower expectations reduce the need for another hike, although the Fed's decision has somewhat altered the balance. Nevertheless, Els expects rates to remain unchanged next week.
How Inflation Affects R1
Nevertheless, interest is only one part of the expenses households face over the debt repayment years. Inflation constantly erodes the purchasing power of money remaining after these payments.
If inflation averages 3.5% per year over 20 years—using current analyst five-year expectations solely to illustrate the cumulative effect—R1 at the beginning of the period will have the purchasing power of only about 50 cents in today's money by the end of the period.
An item costing R1,000 today will cost approximately R1,990 in 20 years if its price rises at the same rate. Using the higher union five-year inflation expectations of 4.3% results in an even greater difference: R1 in 20 years will have the purchasing power of about 43 cents in today's money, and an item costing R1,000 now will cost approximately R2,320.
None of these figures are forecasts of inflation for the next 20 years. They illustrate what will happen if today's long-term expectations persist throughout the term of a new mortgage. For a household taking out a R1.5 million mortgage now, this means costs are incurred in two directions: interest charged on borrowed money, and the gradual decline in the purchasing power of money left to cover everything else.