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Interest rates hurting household finances

The latest reading of the Altron FinTech Household Resilience Index (AFHRI) confirms the mounting financial pressure facing South African households, mainly due to the Reserve Bank’s restrictive monetary policy stance.


The AFHRI is based on real values and comprises 20 different indicators, all of which are related to household sources of income or asset values. After a strong recovery from the effects of the Covid pandemic, which took the index to a record high (in the fourth quarter of 2021), the AFHRI has taken a dip, mainly as a result of higher inflation and higher interest rates.


Although the index increased marginally from its reading in the 3rd quarter of 2022, it declined by more than 1% compared to the 4th quarter of 2021. Due to seasonal volatility related to end-of-year bonuses and the shopping booms associated with Black Friday and Christmas, the data in the graph is based on the four-quarter average trend in the index, which effectively eliminates seasonal influences.

Employment and labour remuneration enjoy a relatively high weighting in the AFHRI, as these indicators represent the mainstay of the financial disposition of most households.


Key conclusions drawn from the 4th quarter AFHRI reading:


  • The upward trend in new job creation continued in the 4th quarter of 2022, representing one of the major reasons for the relative subdued decline in the overall index value. Unfortunately, this positive effect was diminished by lower levels of remuneration. In real terms, the average monthly remuneration in South Africa has declined by 11.4% over the past year (from R18,470 in the 4th quarter of 2021 to R16,370 in the 4th quarter of 2022). These data refer to the average for both the formal and informal sectors. The comparable average salary for workers in the formal sectors was considerably higher at the end of 2022, namely R26,000.

  • Although household financial resilience was boosted by a substantial increase in surrenders of long-term insurance policies, this trend is not conducive to future financial stability and is a clear sign of the hardship faced by many households as a result of higher inflation, higher interest rates and a low-growth economic environment

  • The reciprocals of civil debt defaults and credit impairments by banks have made a positive contribution to the index, confirming the inherent stability of South Africa’s banking system and the prudent management of debt by households in general. To a large extent, the latter has been necessitated by the sharp decline in the ratio of household income to debt costs.

  • The main reason for the decline in the index is the unwelcome return to restrictive monetary policy by the South African Reserve Bank (despite the absence of demand inflation). The cost of credit (and of capital) has increased by more than 60% since the Reserve Bank started to raise interest rates at the end of 2021.

An indictment of the Reserve Bank’s interest rate policy is the fact that total household credit extension has not remotely recovered from the effects of the extremely high real interest rates that existed before the Covid pandemic and it remains well below the level of a decade ago (in real terms). Since 1998, the total value of outstanding mortgage advances has declined by more than 10% in real terms.

The South African economy has never been able to grow at sustainably high rates in the absence of meaningful growth in private sector credit extension. To the extent that unjustified hawkish monetary policy reduces output growth, fiscal stability will also be threatened.

Inflation targets are not cast in concrete and the Reserve Bank should consider a temporary adjustment from 3-6% to 4-7%. This would immediately allow for a 100 basis point reduction in the repo rate and serve to breathe some life into the economy.




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