The restrictive monetary policy stance by the South African Reserve Bank (SARB) continues to weigh on South African households, with most remaining under severe financial pressure amid the higher interest rates.

This is according to the third-quarter 2023 Altron FinTech Household Resilience Index (AFHRI), published on Tuesday, which indicates that the pronounced recovery and new growth impetus that occurred shortly after the worst of the Covid-19 period was halted in its tracks and then reversed by the restrictive monetary policy of the SARB.

A strong – and predictable – inverse correlation exists between higher interest rates and the AFHRI trend, explained economist Dr Roelof Botha, who compiles the index on behalf of Altron FinTech.

“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 is despite the fact that the consumer price index is comfortably within the SARB’s target range for inflation of 3% to 6%, and that there are clear signs that inflationary pressures have receded since the second half of 2023.”

First-time home buyers have been particularly hampered by the high interest rates, with the average deposit required for a bond for first-time home buyers, as administered by BetterBond, increasing significantly from 8.2% in 2019 to 14.7% last year.

There has also been an increase in credit impairments by the banking sector.

Predictably, the ratio between household disposable income and household debt costs has been the worst-performing indicator included in the AFHRI, Botha added.

“After increasing consistently since 2016, this ratio took a hefty knock in the second quarter of 2020 induced by the Covid-19 lockdowns, but then quickly recovered to a multi-year high. The reciprocal of this ratio, debt costs to income, has risen from a low of 6.7% in the fourth quarter of 2021 to 8.9% in the third quarter of 2023 – an increase of some 33%,” he continued.

More positive, he said, is the decline in South Africa’s long-term bond yield of 120 basis points over the past three months, which is a clear indication the global and domestic capital markets are anticipating a drop in money market rates in the near future, possibly in the first quarter of 2024.

In the third quarter of 2023, the AFHRI recorded a value of 109.9, a marginal increase compared to the level of 109.1 during the second quarter of the year. No meaningful change was recorded year-on-year, although signs have emerged that the AFHRI has reached a trough.

Botha said that lower interest rates will almost certainly lead to a new growth trend for the AFHRI, but the lingering effects of higher debt levels and subdued wage growth will be felt during the first half of 2024.

“Since 2014, the average yearly improvement in the index is less than 1%, which serves as a clear indication of the economy’s underperformance, mainly because of low investor and business confidence resulting from State capture and the erosion of the efficiency of infrastructure. Over the past 18 months, this has been exacerbated by the negative effects of a sharp increase in the cost of credit.

Altron FinTech MD Johan Gellatly added that the results of the AFHRI do not bode well for household consumption spending during the first quarter of 2024, especially after the December holiday period, when personal credit facilities are often stretched to their limits, said.

“While it is too early now to determine how consumers were impacted over December, we are of the view that the start of the year may be tough for retailers across the board, with households clearly under strain, especially those in the lower income brackets.”