How to navigate rising inflation and interest rates

While the latest repo rate hike will hit consumers hard, it is also a sign that the South African Reserve Bank is doing what it can to help fight inflation. The housing sector is the most inflation sensitive sector of the economy, so an aggressive move to raise interest rates now in a bid to stabilise inflation by the end of the year should be seen as a step in the right direction, even though it will require some budgetary restraint until then.

Inflation essentially means that our money has less value, while the cost of goods and services becomes more expensive. Consumers will therefore feel the direct and indirect impact of inflation when they pay for food, fuel, electricity and other daily expenses. Usually, inflation is a result of the economy's inability to meet the demand for goods and services, or an increase in costs to produce certain goods. However, South Africa's current inflation is at an all-time high and can be attributed to external factors such as the ongoing conflict in the Ukraine and global increase in oil prices.

While it may seem like doom and gloom right now, consumers should bear a few factors in mind. Firstly, the South African Reserve Bank responded responsibly to global inflationary pressure by starting its gradual interest rate hike in November 2021. This was after a two-year period of record low interest rates that held steady for several months, affording consumers breathing room to invest in property and other assets.

We have experienced periods where the interest rate was double what it is now. In 1998, as an example, it was sitting at 25.5%. This is not to say the current interest rate will not affect consumers. But it is important to look at the historical context of this rate cycle and to acknowledge that we could see a welcomed drop in the near future.

Also, as the adage says, what goes up must come down. The SARB has a proven record of responding timeously to economic conditions and it will normalise the repo rate as soon as it is satisfied that inflation is decreasing. This sentiment is echoed by Economist Johan Fourie who noted in a report that the major inflation spikes in 2002 and 2008 were short-lived and the SARB reduced rates soon thereafter. Guiding inflation back towards the midpoint of the target band can reduce the economic costs of high inflation and enable lower interest rates in the future.

A property investment is a proven way of buffering yourself against some of the effects of inflation. Not only can it offer a source of additional and recurring income as a rental property, but is a tangible asset that increases in value during inflation.

The current inflationary environment and interest rate hikes is a strong reminder that affordability should always be a consideration when buying a home. This is especially true in a scenario where rising unemployment, load shedding, fuel costs and wage demands could constrain economic growth. Be clear about what you can afford to pay each month, factoring in your household expenses as well as the cost of maintaining a home. If possible, put down a deposit on your home as this will reduce the monthly payments and the overall interest payable on the bond.