The recent increase in the repo rate, combined with steep increases in fuel and energy prices, points to a torrid time ahead for South African consumers battling to make ends meet – but if the central banks get this right, the short-term discomfort should pay off in the long term, says employee benefits advisory firm NMG Benefits.

It sounds counter-intuitive to ordinary consumers struggling to balance their budgets, but the recent series of increases in the repo rate are designed to keep inflation at bay in the broader economy, says NMG’s head of investments, Raazia Ganie.

While consumers will be constrained for now, the longer-term effect is that they end up spending less. In theory, this means demand for goods goes down, and prices are brought back in line, in response to supply and demand principles. Now, however, external factors like the Russia/Ukraine war mean the normal tools to manage inflation (monetary policies) may not be as effective.

One of the immediate effects of the increasing interest rates is that households who have debt will now have higher debt repayments to make. This raises the risk that highly indebted consumers will start defaulting on their debts. The flip side is that those who have excess funds will save more, as they will earn more interest on their savings.

“Right now, our advice to all consumers is that they should aim to pay off their debts as quickly as possible – and where they are in difficulty, they should seek help and debt counselling. They should also avoid taking on new debt, or even worse, taking on additional debt to pay off debt, as this will lead to a slippery slope which will be hard to recover from,” said Ganie.

Consumers who are nearing retirement should discuss the best way forward with their financial advisors. Those who are five years or more from retirement should remain invested, but consult their advisors to get a holistic view of their commitments and assets, and work out the best strategy for their circumstances. Knee jerk reactions during times of market turmoil usually lead to sub-optimal outcomes.  

In addition, retirement funds are now compelled to allow members to leave their assets in the fund after they retire or resign. This offers members who have the means to leave their assets in the Fund, the opportunity to benefit from the lower institutional fees offered by retirement funds, while their investments recover from the current turmoil.

The increased interest rates will also hit local businesses hard, as they could find it harder to obtain or service loans, which could limit their growth. As with consumers, though, businesses with excess cash will benefit from putting their money in higher yielding investments.

From an investment perspective, banks are generally among the companies which benefit the most from higher interest rates, while companies investing in luxury goods may struggle as consumers cut back on luxury spending. Goods with inelastic demand, usually staples, will continue to see regular demand levels, says Ganie.

However, this is under normal circumstances. Right now, the world is being held to ransom for food and energy. Essential inputs into many staple foods have seen significant price increases, which are being passed on to consumers. This becomes a vicious cycle as consumers are already highly indebted and struggling to keep their heads above water. “Hopefully, as the situation in Ukraine is resolved, we will see relief for consumers, but when this may occur remains highly uncertain. The effects of this will also be felt for a long while to come,” said Ganie.

Within a portfolio context, investors will have diversified holdings of instruments across multiple asset classes such as equities, bonds cash and property - all of which would react differently to the interest rate changes.

“Markets are volatile now, with the Russia/Ukraine war, global interest rate hikes and higher inflation and petrol prices causing uncertainty. During times of market turbulence, it’s best to stay the course and not make any impulsive changes. Your professional portfolio managers will continue to evaluate the opportunities on your behalf and make changes as these become available,” said Ganie.

T&Cs apply. The NMG SA Group of Companies are authorised financial services providers t/a NMG Benefits.