Interest Rate Straitjacket: SA’s economy chokes under borrowing costs

AS South Africa grapples with the aftershocks of recent interest rate decisions, the repercussions for everyday consumers and businesses are becoming painfully clear.

The latest stance of the SA Reserve Bank (Sarb), marked by a rather cautious approach towards monetary policy, is sending ripples through the economy, threatening to disrupt growth at a time when recovery is both crucial and tenuous.

With inflation forecast to reach a new low point in 2025, Ssarb still maintains a restrictive monetary stance with a terminal interest rate of 7.25%. This decision echoes through the financial corridors of the nation, fuelling a narrative that could lead to a significant slowdown in economic activity.

In its latest interest rate meeting, Sarb described its position as a “hawkish hold”, deliberating on the implications of not merely domestic pressures but also the global environment characterised by trade tensions and tariff threats.

A report by Momentum Investment, when analysing the figures, said Sarb indicated that “the unprecedented economic conditions characterised by high inflation and increased commodity prices” necessitated their careful decision-making.

Households and businesses are now bracing for a reality where financial flexibility is significantly curtailed, giving rise to fears about persistent economic stagnation. Moreover, the economic growth projections for 2025 were lowered from 1.8% to 1.7%, with Sarb stating, “this adjustment reflects a more cautious outlook amidst ongoing external concerns”.

The stark reality of this situation is laid bare in the implications for borrowing costs. Individuals with existing loans—particularly those on variable interest rates—face increased monthly payments that could erode their disposable income significantly.

Data from the report confirms that “for consumers with loans of less than R1.6 million, the new monthly payment stands at R16 515”, unchanged from previous levels but indicative of the stagnation in financial manoeuvring space available to households. “Rising costs are creating a burdensome cycle,” an economic analyst said. “Families must prioritise essential spends, leading to a decrease in consumption that is critical for stimulating growth.”

Potential inflation shocks, fuelled by proposed VAT hikes, could further exacerbate these financial strains. Sarb noted: “VAT was also flagged as an upside risk with an estimated passthrough of 75%.” Governor Lesetja Kganyago elaborated on inflation risks: “While inflation is still in the bottom half of our target range, it has edged higher over the past few months.” He further said: “A marginally lower inflation outlook … is mainly due to the better fuel-price projections. It also reflects a more benign path for administered prices, given the lower electricity tariffs announced by Nersa in February.”

As consumers brace themselves for the expected increase in the cost of basic goods and services, the looming spectre of higher borrowing costs could create a perfect storm of economic downturn, driving households deeper into financial distress. “A heavy reliance on credit becomes unsustainable when costs continue to escalate without significant wage growth,” a financial expert warned.

With borrowing costs already elevated and Sarb maintaining its hawkish stance, many analysts are voicing concerns about the impact on consumer confidence. “Higher borrowing costs can make consumers apprehensive about taking on new debt or big-ticket purchases,” the report noted. This ring of uncertainty could lead to a decrease in spending, making it increasingly difficult for retail and service sectors to thrive.

Sarb concurs, indicating that: “These global headwinds could dampen South Africa’s growth prospects through weaker external demand, higher inflation from supply chain disruptions, and increased financial market volatility.” The visibility in retail sales as a barometer of consumer sentiment indicates that people are tightening their belts, leading to reduced demand.

Against this backdrop of high interest rates and looming VAT hikes, businesses face an uphill battle. For many, the burden of inflated operational costs coupled with shrinking consumer demand creates a precarious balancing act that risks stifling investment and innovation.

Samuel Seeff, chairman of Seeff Property Group, expressed disappointment: “The decision is disappointing and a missed opportunity to provide vital relief to consumers and property buyers, and a boost to the economy.” He noted how higher borrowing costs discourage buyers: “When the interest rate stays the same or increases, a large percentage of potential buyers take a wait-and-see approach.”

Chris Tyson, chief executive of Tyson Properties, highlighted challenges within South Africa’s property sector: “Many businesses are cutting back on expansion plans and reinvestment due to uncertainty. This leads to a lack of job creation, affecting employment levels and wages.” However, Tyson remained cautiously optimistic about prior rate cuts: “The combination of three consecutive interest rate cuts since September 2024 is still to have a positive impact.”

Sarb has acknowledged these challenges while underscoring that “stabilising inflation remains crucial to restoring confidence”. However, achieving this goal is fraught with potential pitfalls. The state of load shedding continues to loom large over productivity and economic growth prospects. As detailed in the report: “The cost of load shedding to the economy was estimated to be R481 billion in 2024,” indicating serious long-term repercussions for businesses reliant on consistent power supply.

Sarb described the country’s domestic economic environment as being “largely stable, although there are uncertainties”. Yet this stability feels fragile for many South Africans who face elevated borrowing costs and shrinking disposable income—a stark reminder of how deeply monetary policy decisions can affect lives across the nation.

In light of external pressures such as global trade tensions and strained international relations, Sarb’s decisions come under scrutiny. The Organisation for Economic Co-operation and Development (OECD) predicts global growth tapering from 3.2% in 2024 to 3.1% in 2025—further complicating South Africa’s recovery trajectory.

As noted in Sarb’s report: “The highest borrowing costs could potentially curb economic activity,” foreshadowing further downward revisions in growth forecasts projected at just 1.6% for 2025. Kganyago said: “Stabilising inflation remains crucial,” but acknowledged risks skewed towards higher inflation over time.

Ultimately, South Africa’s intertwined challenges—elevated borrowing costs and reduced economic activity—paint a dire picture for its economic landscape. As consumers brace for rising costs and businesses recalibrate strategies amid tightening conditions, Sarb must tread carefully between stabilising inflation and fostering recovery.

The question remains: Can South Africa withstand these pressures or have recent monetary policies set it on an irreversible path towards stagnation? Only time will tell as households and businesses navigate this precarious terrain tethered closely to Sarb’s decisions.