Most economists agreed that it also signals the start of a rate cutting cycle that will last well into next year and may well see the prime rate fall to below 10%.
South African Reserve Bank (SARB) Governor Lesetja Kganyago today announced a cut in the repurchase rate (repo rate) for the country.
Frank Blackmore, lead economist at KPMG told Business Report that the decision was taken as inflation moved below the central bank’s target range of 4.5%.
Blackmore said, “There were votes for a larger reduction at the MPC meeting, the decision was taken to implement a 25 BPS reduction with one meeting of the MPC still to go in November this year, where the expectation is for a further 25% or even a 50 BPS reduction if the inflation rate is sustained in this period.”
“The governor made it clear they intend to continue with the interest rate reduction cycle until a repo rate of around 7% is reached, which translates to a prime rate of 10.5% and this will be important for consumers and businesses alike, meaning less of their income will go towards servicing debts and more could be spent in the economy,” Blackmore said.
“The importance of that is noted to projections of GDP growth where on an expenditure approach, private consumption expenditure accounts for around 65% of GDP and any increases in private expenditure can translate into higher growth in the second half of this year, and into next year as well,” Blackmore further said.
“Most economists agreed that it also signals the start of a rate cutting cycle that will last well into next year and may well see the prime rate fall to below 10% - barring any unforeseen global or local disasters that cause a sudden increase in inflation,” Stephen Whitcombe, MD of the Firzt Realty group said.
“As it is, the annual inflation rate has been declining since the start of this year and dropped to 4,4% in August, down from 4,6%. This puts it below the midpoint of the Reserve Bank’s preferred 3% to 6% range and, given the current strength of the Rand, it is expected to decline even further and create space for further rate cuts,” Whitcombe said.
For existing homeowners, the majority of whom have variable-rate home loans, interest rate cuts mean an immediate decline in the minimum monthly repayment.
This makes the loan more affordable and reduces the chance of them defaulting and losing their home.
This week’s rate, for example, will immediately reduce home loan repayments by around R17 for every R100 000 outstanding – or R170 per R1m.
“This may not seem like much, but rate reductions also mean smaller repayments on other forms of debt such as car finance, personal loans and credit and store card balances, and the combined savings give homeowners even more ‘room to breathe’. In fact, they may even give them an opportunity to pay off more than the minimum on their home loan each month – a practice which will increase their equity in the property - and could save them many thousands of rands over the life of their home loan,” Whitcombe added.
Paying just R200 a month more on a home loan of R1m would cut your repayment time by 14 months and save you almost R125 000 worth of interest on a 20-year loan with an interest rate of 11,5%.
As lower interest rates make homes more affordable, homeowners are also likely to see the demand for housing go up and the value of their properties increase.
BUSINESS REPORT