Hike or hold, Wednesday’s interest rate decision won’t fix your client’s budget

Today, Wednesday, 23 September, the Reserve Bank will announce its latest interest rate decision, and most of the discussions will ask one question – will rates go up, down or stay where they are?It is a fair question. But, for many of the households we speak to, it is not the most important one.

In May the Reserve Bank raised the repo rate for the first time in three years, taking it to 7% and the prime lending rate to 10.5%. In July it held rates steady, but two of the six members of its Monetary Policy Committee voted for a further increase. With inflation still above the Bank’s 3% target, the relief many South Africans have been waiting for has, for now, stalled.

My advice is simple. You need to budget according to the repayments and living costs you face today, not a reduction you hope will arrive. Even if rates eventually come down, the timing and extent of that relief are uncertain.

Further to that, interest is also only one part of the picture. Households are being squeezed from several directions at once including fuel, transport, electricity, insurance and other essential costs. On a R1 million home loan, a 0.25 percentage point move in the rate changes the monthly repayment by roughly R170. That matters, but a small change in the repo rate will not, on its own, resolve the wider affordability pressure consumers are facing.

A steady salary is no longer a safety net

We are seeing greater pressure in those now approaching National Debt Counsellors for help. Since the May increase, the clearest pattern is that consumers have less room to absorb rising costs. Pressure is increasingly reaching households with regular incomes and

a strong history of meeting their commitments, not only those traditionally considered high-risk borrowers.

Many people entering debt review are also carrying newer credit, including accounts from smaller lenders that are less familiar in the traditional credit landscape which is a sign that consumers are reaching for a broader range of providers to manage short-term pressure. Most people come to us because several smaller pressures have accumulated, not because of one isolated event.

Some households have already cut back and postponed major purchases. Others are bridging the gap with credit while they wait for conditions to improve. The greater risk is not optimism about rate cuts but that many households have already made several adjustments and have very little flexibility left. Hope becomes a problem when it delays action, and a recurring shortfall is treated as temporary because next month might be easier. There is a difference between being optimistic about the economy and having a workable plan for your household.

Whatever Wednesday brings, don’t borrow to bridge the gap

If rates rise, the most damaging response would be to use more credit to cover the higher monthly shortfall. It buys breathing room but adds to the household’s debt without fixing the underlying problem. If rates are held, the risk is complacency. “No change” does not mean your finances have improved. It means borrowing costs did not rise further at that meeting.

For those already under debt review – where reduced interest rates have been agreed and fixed under your arrangement, they do not move simply because the repo rate changes, although the specific terms of your plan matter. Keep making the agreed payment, stay in contact with your debt counsellor, and raise any difficulty early because rising living costs can affect affordability even when your repayment stays the same.

A rate cut won’t erase what you owe

Temporary financial pressure can leave a lasting repayment burden. A household borrows to get through one difficult month. If the shortfall continues, it must then cover its normal costs and repay what it borrowed before, and each new commitment leaves less of the next salary available.

That is why reducing the cost of borrowing and restoring affordability are two different stages of recovery. A rate cut helps borrowers with variable-rate debt, but it does not erase balances already built up. A consumer could benefit from a lower rate and still be worse off than a year ago if they now have more accounts, larger balances or depleted savings.

The real signs of improvement lie elsewhere. Are outstanding balances reducing? Can essential expenses be covered without borrowing again? Is there gradually more room to absorb an unexpected cost?

So whatever the committee decides, look at the direction of your finances, not only the latest balance. Compare the past three months. Is money running out earlier? Are savings being used regularly? Are debts growing despite payments being made? If there is a recurring gap, get an assessment of the problem and your options rather than treating each month as a separate emergency.

And if you have been managing carefully and are still falling behind, that does not mean you have been irresponsible. A household can budget carefully and still be overwhelmed when several unavoidable costs rise faster than its income. Do not ignore the shortfall, and do not be ashamed to ask for help. Responsible financial management also means recognising when circumstances have changed and your current repayment structure is no longer sustainable.