In July 2019 the South African Reserve Bank Cut Rates
What exactly is this ‘rate’?
All Monetary Policy is set by the bank’s committee which is applied to maintain price stability for sustainable and balanced economic growth.The repo rate is the benchmark interest rate at which the Reserve Bank lends money to other banks. Changes in the repo rate affect the prime lending rate, which is the lowest rate at which banks start lending to clients. With the repo rate down, the prime lending rate will decline from 6,75% to 6,50%.
Why does the rate get changed through Monetary Policy?
In short, SARB’s Monetary Policy is conducted within a flexible inflation-targeting framework. This aims to optimize economic growth during various economic cycles. Interest rates and Inflation are positively correlated. This means that they move together. As interest rates increase, inflation will also increase and vice versa. There is an optimum target range for inflation. The SARB aims to keep inflation within that range and this is why interest rate smoothing may be applied over various economic cycles. Focusing on economics ‘supply’ and ‘demand’, when there is a ‘supply shock’, normal supply will either increase or decrease which in turn, decreases or increases prices(inflation) respectively. The SARB will need to determine an appropriate time horizon to restore inflation back to the target range.Chief economist, Azar Jammine, stated the reason for the rate cut:“Much of the expectation surrounding a rate cut is based on the view that the economy is extremely weak and the inflation rate has declined to the midpoint of the inflation target, creating a favourable environment for contemplating a rate cut”Efficient Group economist Francois Stofberg commented that, if you compare South Africa’s interest rate to that of the global community, there has been clear global shifts in international monetary policy. South Africa’s real interest rate compared to our peers globally is about 1.5% higher. He believes that we will not see the rand depreciating again due to the global community decreasing rates. In June, the rand strengthened by around 3%. Contrary to popular belief, this was not the deciding contributor to the rate cut. The 3%-rand increase was viewed as a short-term phenomenon that occurred from other economic and global indicators.The core inflation rate i.e. price increases excluding food and energy prices, rose to an annual rate of 4.3% in June, up from 4.1% in May. In July, core inflation declined to 4.0% as the interest rate was cut by 25 bps..
What does this mean for me?
There are many ripple effects of a decreasing repo rate that may affect you, to name a few:
- For homeowners, a reduction in the repo rate can be expected to reduce equated monthly installments on your existing home loan. It is also cheaper to take out new loans. This does not always happen with immediate effect.
- When the repo rate drops, so do property prices. This makes purchasing a home or a property for investment less expensive. When repo rates drop it is usually considered a ‘buyers’ market’ in the property industry.
- Money becomes less expensive for banks to borrow, which means your credit becomes less expensive as well. However, be careful to keep your credit score healthy and only borrow for the things you really need.
- The repo rate also affects your buying-power as a consumer, as it directly influences the inflation rate.