How will the interest rate hikes affect you – and your bond repayments?

The SA Reserve Bank opted to hike the repo rate by 50bps to 6,75% at its Monetary Policy Committee meeting in January this year.

Since July 2014, interest rates have increased by a total of 175bps, raising the repo rate from 5% to 6,75% and the prime lending rate from 8,5% to 10,25%. For an individual with a bond of R1 million, their monthly repayments will have increased by around R1 460 per month in 18 months.

The main reason for the rate hike has been concerns that the inflation outlook has deteriorated significantly, mainly due to a weaker exchange rate and higher food prices. Inflation is now expected to average 6,8% in 2016 and 7,0% in 2017. This compares with the previous forecast of 6,0% and 5,8%.

Further interest rate hikes will be determined by our inflation rate, which is still expected to breach the upper end of the target in the first quarter of 2016 and is now expected to remain outside the target for the entire forecast period. A peak inflation rate of 7,8% is expected in the fourth quarter of 2016 and the first quarter of 2017, followed by a moderation to 6,2% in the final quarter of that year.

Given these figures, the Reserve Bank is concerned that inflation will move well above the upper end of the target and become entrenched at a higher average level, which is why it’s increased rates, despite a far weaker economy. Economic growth was revised down from 1,9% to 1,5% for 2016 and from 2,1% to 1,6% for 2017.

Given the revised outlook for SA’s inflation rate, Stanlib economist Kevin Lings expects the Reserve Bank to continue increasing interest rates in 2016 by a further 75bps, raising the repo rate to 7,5% and the prime lending rate to 11% by the end of this year. For home-owners, that will mean paying an additional R625 per month per R1 million bond. The repayment on a R1 million bond will be around R10 320 per month by year-end.

The best way to protect your bond against further rate hikes is by increasing your bond repayments by 10%, even if it means cutting your monthly expenditure on other things, such as entertainment or non-essential groceries. You’ll have adapted your budget to absorb the higher payments and have the advantage of paying off capital until the rate increases come into effect.

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