Lower Policy Rate Helps Rich, Not Poor, SARB Researchers Say

SOUTH AFRICA (Capital Markets in Africa) — The South African Reserve Bank is powerless when it comes to alleviating debt-service costs for the poorest 80% of the country’s people, researchers at the Pretoria-based central bank concluded.

Reductions in the repurchase rate generally lead to lower borrowing costs for the richest 20%, but they’re negatively correlated with lending rates for the rest, economists Kerschyl Singh and David Fowkes wrote in a research paper published on the central bank’s website.

“Interest-rate cuts reduce borrowing costs for richer South Africans, but the effects are smaller or non-existent for those further down the income scale,” the economists wrote. “This is interesting because it suggests adjustments in the repo rate are essentially immaterial for the borrowing costs of most South Africans.”

The richest one-fifth of South Africans are more exposed to changes in the policy rate because they hold the majority of debt benchmarked against it, such as mortgages and vehicle loans, the researchers said. That also reduces their borrowing costs because those debts have collateral.

By contrast, poorer households rely more on informal loans and micro-finance without surety. As a result, the poorest one-fifth pay interest rates that are, on average, more than five percentage points higher than those for the richest 20%, the researchers found.

The Reserve Bank has cut the repurchase rate four times this year by a combined 2.75 percentage points to a record low 3.75% as a coronavirus-induced lockdown ravaged an economy that was already in recession. The prime rate — which commercial banks use as a reference to determine interest charges — declined by the same margin to 7.25%.

South Africans spend, on average, 9.4% of their disposable income to service debt, according to central bank data. The ratio has been rising since 2016.

Source: Bloomberg Business News