South Africans Brace for Higher Mortgage and Car Loan Costs

Absa’s senior economist has cautioned that any significant reductions in interest rates are unlikely to materialise before 2027. This outlook signals that South Africans may need to prepare for a prolonged period of high borrowing costs, with the pressure from elevated interest rates expected to persist for at least another year. This means that those hoping for immediate financial relief will need to budget carefully and reconsider major spending decisions, as the cost of credit is set to remain expensive throughout 2025 and into 2026.

Key Takeaways

• Interest Rate Cuts Pushed to 2027: Absa’s outlook suggests that meaningful rate cuts are unlikely before 2027, meaning households repaying mortgages, car loans, and other debt will continue to feel pressure from high borrowing costs.
• Sticky Inflation Remains a Challenge: Inflation, although down to 3%, is expected to stay above SARB’s target for the next two years, limiting the central bank’s ability to lower rates without risking renewed price increases.
• Criticism of SARB’s Tight Policy: Economists like Roelof Botha argue that SARB’s restrictive stance is stifling growth and worsening unemployment, warning that current prime lending rates are unnecessarily high and harming household resilience.

Implications for Households with Debt

For families and individuals who are currently repaying home loans, car finance agreements, and other credit facilities, the absence of imminent rate cuts will prolong financial strain. Monthly instalments on mortgages and vehicle repayments will stay relatively high, keeping household budgets under pressure for an extended period.

During a webinar presenting Absa’s quarterly economic outlook, senior economist Miyelani Maluleke stated that the South African Reserve Bank (SARB) is unlikely to implement further rate reductions in the short term. He explained that the bank’s base case scenario suggests it will be challenging for SARB to deliver meaningful interest rate cuts in the coming quarters. This message reflects growing concern that even small cuts may only come once there is significant evidence that inflation has permanently stabilised.

Inflation Trends and Projections

Although South Africa’s headline inflation dropped to 3% in July, Absa’s internal forecasts indicate that inflation will remain stubborn, averaging around 3.9% in 2026 and 3.5% in 2027. These projections are slightly higher than the SARB’s own forecast of 3.3% for 2025 and 2026, and 3% for 2027. This divergence in expectations suggests that the path back to lower inflation is proving slower than policymakers would prefer. A prolonged period of sticky inflation effectively ties the hands of the Reserve Bank, as lowering interest rates too soon could risk fuelling price increases once again.

SARB’s Inflation Target and Anchor

The Reserve Bank recently confirmed its intention to formally adopt 3% as its new inflation anchor, which represents the lower bound of the current target range of 3% to 6%. Maluleke noted that Absa supports this decision and sees the move from a midpoint anchor of 4.5% down to 3% as a positive step in lowering long-term inflation expectations. However, he expressed concern that the central bank’s timeline for reaching this lower anchor is overly optimistic, arguing that inflation will remain elevated for longer than SARB anticipates.

Criticism of SARB’s Policy Approach

Economist Roelof Botha has been sharply critical of the central bank’s approach. He argues that SARB’s narrow focus on pushing inflation down to 3% is misguided, contending that South Africa will structurally experience higher inflation compared to advanced economies. He stressed that South Africa’s geographic distance from major global consumer markets results in persistently higher import costs, which add an extra 1% to 3% to inflation on top of the volatility introduced by exchange rate fluctuations. Botha’s comments reflect a growing school of thought that believes overly tight monetary policy may be holding back economic recovery and suppressing growth unnecessarily.

Botha also highlighted that much of South Africa’s recent inflationary pressure stemmed from external shocks beyond the control of any central bank. He pointed to the dramatic surge in global shipping rates, which climbed by 700% after the Covid-19 pandemic, as well as oil price increases of 400% triggered by geopolitical conflicts such as Russia’s invasion of Ukraine. These cost-push shocks, he argued, could not have been neutralised by higher interest rates. This view suggests that rate hikes may have punished consumers for price spikes they had no control over, without addressing the real cause of inflation.

Restrictive Policy and Employment Impact

In Botha’s view, the MPC’s decision to raise interest rates to a 15-year high was unnecessary, as there was no evidence of demand-driven inflation in the domestic economy. He asserted that such a restrictive policy stance had the unintended consequence of worsening unemployment levels and intensifying hardship for ordinary South Africans. High rates have raised borrowing costs for businesses as well, which may have delayed investment decisions and contributed to slower job creation.

Recent data from the Altron Fintech Household Resilience Index revealed a 2.5% year-on-year increase in household resilience, which was five times greater than GDP growth. However, Botha warned that this improvement was partly driven by households tapping into their retirement savings through the newly introduced two-pot system, a trend that may not be sustainable in the long term.

Conclusion

South Africans hoping for lower borrowing costs will need to prepare for a long wait, as interest rate relief is unlikely before 2027. With sticky inflation and a cautious Reserve Bank, monthly debt repayments will remain expensive, keeping pressure on household finances. Critics argue that this approach risks sacrificing growth and job creation, suggesting that a more balanced policy could support recovery without letting inflation spiral out of control.