Responsible financial decisions are vital
to surviving rising inflation and interest rate hikes

As inflation continues to rise, so do interest rates – putting more pressure on South African consumers. Statistics South Africa recently announced headline inflation growth of 6,9% in January to 7% in March, with core inflation increasing by 0,3%. This is concerning as the South African Reserve Bank (SARB) aspires to maintain inflation below 6%. Last week, the SARB delivered a mighty blow by increasing interest rates by 0,50% (50 basis points). This hike brings the prime lending rate to 11,25% - the highest it has been since 2009, the peak of the 2008 financial crisis.

According to Pieter Albertyn, Head of Product Solutions at Momentum Investo, interest rate hikes increase the cost of borrowing considerably, which over the long term, reduces ordinary working South Africans’ ability to save. Eighty20 reports revealed the average middle-class South African now spends roughly two-thirds of their salary paying off their debts.

“These kinds of interest rate hikes are only making it worse, so many households are in for a bad run if this continues,” says Albertyn.

Additionally, Albertyn says the high cost of living poses an imminent threat to retirement savings. He says a higher cost of living will likely lead individuals to lose focus on long-term investments and savings or even completely withdraw from their retirement savings without considering the consequences.

“Consumers should avoid the impulse to withdraw or neglect their long-term investments as doing so risks incurring substantial costs. Potential direct costs include exit penalties from withdrawing before the end of the savings term and losing out on the compounding effect of future investment returns represents an opportunity cost,” he says.

He says long-term investors who remain invested and reinvest the growth on their investments benefit from the effects of compound interest. This enables investors to receive additional growth on the investment returns that they have already earned.

Speaking to how South Africans can avoid accessing their retirement savings, he says putting money away for emergencies is essential. "Some retirement savings plans don’t allow investment owners to access their money until they reach the age of 55. However, other specific investment offerings like the Investo Retirement Annuity allow investment owners to take contribution holidays. The investment owners can skip their contributions for a few months without suffering a penalty.”

However, he says consumers should make sure they put money away for emergencies. “If you have money for a rainy day, you don’t have to dip into your long-term savings and disrupt your savings plan.”

While dark clouds are gathering, Albertyn believes that there is a silver lining for investors. Investors can take advantage of the higher expected investment returns caused by the increasing interest rates by saving more. At the same time, they must be cautious about how much debt they take on. “Investors hoping to reduce the extent of the tax they pay on their growth should bear in mind that contributions to retirement annuities are tax-deductible,” he advises.

Despite the immediate financial pressure caused by inflation and rising interest rates, Albertyn says consumers should consider their long-term financial goals and maintain their retirement savings. “You can empower yourself for the future by making responsible decisions today. At the very least, speak to a financial adviser to get an informed perspective on your journey to success,” he says.