The South African Reserve Bank (SARB) announced a cut in the repurchase rate on Thursday, taking it to 7.5%.
Frank Blackmore, Lead Economist at KPMG South Africa MPC Reaction said that the Monetary Policy Committee (MPC) of SARB has decided to reduce the repo rate by a further 25 basis points.
This means prime will be set to around 11% from this point onwards.
“The reason is that there was a contraction in the economic growth in Q3 and this was largely inconsequential and determined by a out of a sync decrease in the size of the agricultural contribution to the economy. The expectation of the bank is that in Q4 of 2024 a higher level of growth is expected, or growth is expected to rebound based on the reductions in interest rates that took place over this period, as well as the two-pot withdrawals and have further growth on strengthening in consumer spending over that. Inflation ended the year 2024 at 4.4%, just marginally below the target rate,” Blackmore told Business Report.
“Largely as result of benign fuel costs and the lows in food price inflations that were experienced in the previous months. Core is seen by the bank to remain below 4.5% target over the entire forecast period. Even though they have detected a weaker rand and have taken this into account, they still decided to reduce by 25 basis points. The Governor did make clear however that the risks are on the upside both in domestic factors in terms of administrative prices, public sector wage increases, etc, as well as external factors around the world,” Blackmore added.
“The decision to reduce the repo rates by 25 basis points was won by a vote of four votes to two, where two people on the committee wanted to hold rates the same. However, all members are concerned about the uncertainty that lies ahead, especially with these external factors that include the new administration in the US and a possible tariff induced trade war type of situation. The Governor also discussed the fact that they had done some scenario analysis around such a trade war and that obviously would be inflationary and require higher level of interest rates than what is predicted without that trade war,” Blackmore said.
“The second scenario that the Reserve Bank looked into was if we carried on with the economic reforms, boosting economic growth to around 3% in the medium- term period. This would also be accompanied by a decrease in interest rates as well as inflation over that period, proving that factors such as the level of debts, the efficiency of network industries and keeping an alert on wage increases would remain important to the economic outlook of the country,” Blackmore said.
Hayley Parry, Money coach and facilitator at 1Life’s Truth About Money said the rate cut is good news for a consumer who is paying of any kind of debt.
"The reason for that is since September last year, it means that our prime interest rate is now down from 11.75% to 11%. So, what that means practically is that for every million rand that you owe on a home loan for example, your repayments have reduced by around R500 since September last year. Now this is good news for consumers repaying any kind of debt because it means that that debt is now less expensive and that is going to be important because just a few minutes after the interest rate cut was announced we heard that is Eskom’s request for an increase in electricity tariffs has been approved and that the cost of electricity is going to increase by 12.7% from the 1st of April,“ Parry said.
"What does that mean for us? Well it means that any savings that you may have coming your way in terms of your cost of repaying debt quite possibly from the 1st of April will be going towards paying for increases in electricity. So that gives us a window in Feb and March where you can potentially put away a little bit of extra money, whatever it is that difference that you are saving on the repayment of your home or your car, your credit cards for example,“ Parry added.
She advised to put that money into an emergency fund and put that money away because you know that not only can you know anything happen in terms of what you might need to put that money aside for but we definitely know that there’s a steep increase coming from the price of electricity from the 1st of April.
Brina Biggs, Senior Manager at Budget Insurance, said, “Potentially short-lived reductions from the staggering 475 basis points rally we have just experienced. Albeit South African’s metrics are well in line with the inflationary target band, averaging at 4,4% for 2024 (the lowest in the last 4 years) the MPC will be focusing on the external unknowns that may pose a risk further down the line. Some of the notable concerns are the global economic uncertainties and President Donald Trump’s yet to be tabled trade policies, both posing a risk to global inflation, including SA, and so caution should therefore be exercised as things unfold.”
“Uncertainty is simply a fact of life, so to weather 2025 it is pertinent to budget away those expensive days that still lie ahead, by not taking on any further debt, especially if your budget is already tight when it comes to repayments and secondly the savings that the now .75 basis points have afforded households should be smartly allocated to service debt that you may have accumulated over the past couple of years tough economic times,” Biggs further added.
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