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IOL News
a day ago
- Business
- IOL News
Reserve Bank's interest rate cut: response to low inflation and economic challenges
The South African Reserve Bank has lowered interest rates in response to a low inflation rate, but experts warn that rising taxes could still burden households. This article explores the implications of the rate cut and the ongoing economic challenges facing South Africa." Image: File The low inflation rate was the driver behind the South African Reserve Bank (Sarb) Governor Lesetja Kganyago lowering interest rates this past week. Kganyago announced that the central bank's Monetary Policy Committee (MPC) voted to decrease the repo rate from 7.50% to 7.25%. This means that the prime lending rate in South Africa has been lowered from 11% to 10.75%. Frank Blackmore, Lead Economist at KPMG told Business Report that the reason for this was the low inflation rate. Blackmore said, "The Reserve Bank remains data dependent in that respect, as well as the easing of some of the risks such as the exchange rate. Appreciation from the highs over R19, back down to around R18 to the dollar level and as well as the oil prices, which have remained low at this point. They have also taken into consideration that the Value Added Tax (VAT) hike will not take place, also eases future inflation in that respect." "An interesting analysis was also done by the MPC regarding an upside risk scenario if things worked in the other direction and South Africa would face a kind of stagflation scenario including weak economic growth and tight monetary policy reacting to higher levels of inflation, all caused by perhaps, the trade wars that are currently ongoing globally. Probably more interestingly another scenario where they're reducing the target rate from a current 4 1/2% objective, so the midpoint of the three to 6% range to the 3% objective so the bottom of their three to 6% range. This puts us closer in line with many of our trade partners as well as being closer to the median emerging market rate of around 3%," the economist said. Video Player is loading. Play Video Play Unmute Current Time 0:00 / Duration -:- Loaded : 0% Stream Type LIVE Seek to live, currently behind live LIVE Remaining Time - 0:00 This is a modal window. Beginning of dialog window. Escape will cancel and close the window. Text Color White Black Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Background Color Black White Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Transparent Window Color Black White Red Green Blue Yellow Magenta Cyan Transparency Transparent Semi-Transparent Opaque Font Size 50% 75% 100% 125% 150% 175% 200% 300% 400% Text Edge Style None Raised Depressed Uniform Dropshadow Font Family Proportional Sans-Serif Monospace Sans-Serif Proportional Serif Monospace Serif Casual Script Small Caps Reset restore all settings to the default values Done Close Modal Dialog End of dialog window. Advertisement Next Stay Close ✕ Ad Loading "In this situation, the benefits would also fall to all South Africans meaning that lower inflation would preserve the value of the earnings and wealth in future periods. Given the low inflation that we are currently experiencing this would be the right time to institute such a change," Blackmore further added. Neil Roets, CEO of Debt Rescue, told Business Report that the announcement of a BPS cut to the repo rate may be good news for economists, but will not shield South Africans from the burden of the fuel and sin tax levies that have been introduced by Finance Minister Enoch Godongwana within his Budget 3.0 projection. Roets warned that increased taxing of the workforce is not the answer, referring to the fuel-tax levy and raising sin taxes even higher, and will put further financial strain on households, driving them to new depths of despair. "This, at a time when they are buckling under the weight of multiple unsustainable inflation-related living costs. The reality is that the Finance minister's decision to impose new tax measures will hurt lower-income families most, as they will bear a proportionally higher burden, thus forcing them to make impossible lifestyle choices with the little disposable income they have left,' Roets said. Roets said that Kganyago is a longstanding advocate of shifting to a lower inflation target, arguing this would make the nation better placed to compete with its trading partners. 'A single-point target of 3% would be in line with South Africa's peers and lead to lower interest rates in the long term,' he has previously said. "His critics worry that reaching a lower inflation target would require tighter monetary policy however, that would cost growth and employment in a country with one of the highest jobless and poverty rates on earth. The Governor reiterated his view saying that the MPC is of the view that the 3% scenario is more attractive than the 4.5% baseline, and they would like to see inflation expectations move lower, towards the bottom end of their target range. He also said the MPC will consider scenarios with a 3% objective at future meetings," Roets said. A lower inflation target risks scuppering further interest rate cuts this year too, Investec Chief Economist, Annabel Bishop warned Bishop said, 'With a change to the inflation target reportedly occurring soon this year, the Sarb has chosen to cut interest rates this month to avoid the limitation of doing so in the future, but then could easily be at risk of needing to reverse the cut.' 'The reality is that the slow pace of the country's repo rate reductions is perpetuating the debt trap that millions of ordinary South Africans find themselves in, leaving millions with no option but to survive on credit,' Roets further said.
IOL News
2 days ago
- Business
- IOL News
SA Reserve Bank cuts interest rates: What it means for consumers
South African Reserve Bank Governor Lesetja Kganyago. Image: Thobile Mathonsi / Independent media. South African consumers cheered as the South African Reserve Bank (Sarb) cut the interest rate this past week, however, a wider view shows that the relief could be undone by other costs increasing. Sarb Governor Governor Lesetja Kganyago decreased the repurchase rate for the country by 25 basis points (BPS), dropping the repo rate from 7.50% to 7.25%, effectively taking the prime lending rate to the country to 10.75%, from 11%. Hayley Parry, Money Coach and Facilitator at 1Life's Truth About Money told Business Report that the cut could not have come at a better time. Parry said, "What that means is that, for anyone paying back any debt, it means that you are going to be able to save on your debt repayment. For example, for every million Rand you have in a home loan for instance you are now going to be paying R515 less per month at this new interest rate, thanks to the reduction in the interest rate." "It could not come at a better time because there has been a lot of pressure on South African consumers, with increasing electricity prices kicking in. This is great news for anyone who has been feeling the pinch and been struggling to make ends meet. Hopefully, this is going to provide a little bit of breathing room. If you happen to have any money leftover thanks to this reduction in the interest rate, my advice as always is to make sure you put aside extra cash into your emergency fund because you never know when that may come in handy," Parry added. Tando Ngibe, a senior manager at Budget Insurance said, 'This move offers some relief to consumers, particularly those managing debt, as it slightly reduces the cost of borrowing on home loans, personal loans, and credit facilities. This modest cut should be seen as a chance to reinforce, not relax, responsible financial habits. We urge consumers to use any savings from lower repayments to prioritise essential expenses, reduce high-interest debt, and build emergency funds. While the rate cut may support economic activity, it's important to remain cautious. Inflation risks still persist, and returns on savings may decline. Consumers should continue to budget carefully in order to remain financially resilient in these uncertain times.' Video Player is loading. Play Video Play Unmute Current Time 0:00 / Duration -:- Loaded : 0% Stream Type LIVE Seek to live, currently behind live LIVE Remaining Time - 0:00 This is a modal window. Beginning of dialog window. Escape will cancel and close the window. Text Color White Black Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Background Color Black White Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Transparent Window Color Black White Red Green Blue Yellow Magenta Cyan Transparency Transparent Semi-Transparent Opaque Font Size 50% 75% 100% 125% 150% 175% 200% 300% 400% Text Edge Style None Raised Depressed Uniform Dropshadow Font Family Proportional Sans-Serif Monospace Sans-Serif Proportional Serif Monospace Serif Casual Script Small Caps Reset restore all settings to the default values Done Close Modal Dialog End of dialog window. Advertisement Video Player is loading. Play Video Play Unmute Current Time 0:00 / Duration -:- Loaded : 0% Stream Type LIVE Seek to live, currently behind live LIVE Remaining Time - 0:00 This is a modal window. Beginning of dialog window. Escape will cancel and close the window. Text Color White Black Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Background Color Black White Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Transparent Window Color Black White Red Green Blue Yellow Magenta Cyan Transparency Transparent Semi-Transparent Opaque Font Size 50% 75% 100% 125% 150% 175% 200% 300% 400% Text Edge Style None Raised Depressed Uniform Dropshadow Font Family Proportional Sans-Serif Monospace Sans-Serif Proportional Serif Monospace Serif Casual Script Small Caps Reset restore all settings to the default values Done Close Modal Dialog End of dialog window. Next Stay Close ✕ Consumers still drowning in debt Meanwhile, Neil Roets, CEO of Debt Rescue gave a more scathing view on the Sarb's rate cuts. Roets said that the announcement of the 25BPS cut, may be good news for economists but will not shield South Africans from the burden of the fuel and sin tax levies introduced by Finance Minister Enoch Godongwana within his Budget 3.0 projection. Roets said, "Increased taxing of the workforce is not the answer, the fuel-tax levy and raising sin taxes even higher, will put further financial strain on households, driving them to new depths of despair. This, at a time when they are buckling under the weight of multiple unsustainable inflation-related living costs. The reality is that the Finance minister's decision to impose new tax measures will hurt lower-income families most, as they will bear a proportionally higher burden, thus forcing them to make impossible lifestyle choices with the little disposable income they have left." "The reality is that the slow pace of the country's repo rate reductions is perpetuating the debt trap that millions of ordinary South Africans find themselves in, leaving millions with no option but to survive on credit. This scenario has been escalating since the prolonged tightening cycle began towards the end of 2021, when the Monetary Policy Committee raised the repo rate by a cumulative 4.75% between November 2021 and May 2023, taking it from 3.50% to 8.25%, the highest level since 2014. Sadly, this means more and more South Africans are relying on their credit and store cards to put food on the table and keep the lights on," Roets further said. "The likelihood is that they will default on debt and fall into an even deeper trap, as the cost of credit rises due to existing debt. This is most evident with big purchases like home and car loans. South Africans need real financial relief. This is a glaring red flag that should be at the top of the list of concerns of the authorities," Roets said.
The Citizen
3 days ago
- Business
- The Citizen
Weekly economic wrap: Rand strongest since December, but falling again
Although the rand kept its head up all week and strengthened even more on the back of the repo rate cut, it lost traction on Friday afternoon. The biggest economic news of the week was the mostly unexpected cut in the repo rate of 25 basis points, while the rand kept its momentum and reached its strongest level since December. Gold, on the other hand, was not so lucky. Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research, says the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) decided to cut the repo rate by 25 basis points to 7.25%, which means that the prime interest rate is now 10.75%. 'The dovish tilt, with all six members voting for a cut and one member even preferring a 50 basis points cut, was surprising, but welcome. In addition, the clear signalling around moving to a 3% inflation target is positive and removes uncertainty.' Bianca Botes, director at Citadel Global, points out that the rand strengthened to its best level since December, helped by a weaker dollar and the Sarb's repo rate cut, which aims to support the local economy and as inflation remains low. Busisiwe Nkonki and Isaac Matshego, economists at the Nedbank Group Economic Unit, also point out that the rand gained further ground this week. 'The Sarb's interest rate cut and the announcement of the imminent lowering of the inflation target boosted sentiment, lifting the local unit to R17.80/$ late Thursday, and on Friday morning it was trading around R17.83/$.' Unfortunately, the good news did not last, and the rand traded at R18.04 on Friday afternoon. ALSO READ: Reserve Bank cuts repo rate thanks to lower inflation, stronger rand Decrease in prices of oil and gold Oil prices dropped for the second week in a row, with Brent Crude trading near $63/barrel, Botes says. 'This decline is driven by investors remaining uncertain about what will happen with US tariffs, as the legal back-and-forth is making the market more unpredictable. 'Traders are also watching the upcoming expanded Organization of the Petroleum Exporting Countries (OPEC+) meeting, where major oil-producing countries are expected to agree on increasing oil production in July.' Botes says there is extra tension because Kazakhstan is producing more oil than it is supposed to, which could lead to even more supply than planned. On the demand side, recent US economic data shows the economy shrank slightly in the first quarter, raising worries that people and businesses might use less fuel.' She says gold prices also slipped to around $3,290/ounce and are heading for a weekly loss, as investors wait for the PCE index, which could affect future interest rate decisions. Investors also remain cautious as they wait for more clarity on US inflation and interest rates. ALSO READ: Producer Price Index remains unchanged, but an increase is coming Producer price inflation remains muted Lebohang Namo, economist at the BER, says producer price inflation (PPI) for final manufactured goods, remained unchanged at 0.5% in April. 'Like consumer inflation last week, this was above consensus expectations following a string of downward surprises.' Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say continued deflation in fuel, paper products and transport equipment helped keep overall producer inflation contained in April. Nkonki and Matshego, economists at the Nedbank Group Economic Unit, say April's producer price inflation provided more evidence of subdued price pressures. Producer inflation held steady at 0.5%, matching our forecast and exceeding market expectations of 0%. 'Deepening fuel price deflation offset higher food prices. Elsewhere, price pressures remained relatively subdued. Food, beverages and tobacco inflation accelerated from 4.1% to 4.7%, while deflation in coke, petroleum, chemicals, rubber, and plastics deepened from 4.1% to 5.5%. Producer inflation will likely rise moderately off a low base in the months ahead.' ALSO READ: Salaries decreased by 2% in April, but higher than a year ago Private sector credit extension increased in April Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say Private Sector Credit Extension (PSCE) growth increased to 4.6% in April, up from 3.4% in March, largely driven by an acceleration in corporate credit growth, which increased to 6.0% from 3.9%. Household credit growth was 3.0%, marginally higher than the 2.9% recorded in March. Within corporate credit, growth in general loans and advances rose to 7.4% from 4.3%, overdraft growth climbed to 12.6% from 10.3%, and mortgage advances grew by 6.2%, slightly up from 6.1% in the previous month. Instalment sales credit growth remained stable and above inflation at 5.0%, compared to 5.1% in prior months, while credit card growth declined sharply to 0.6% from 2.5%. In the household segment, general loans and advances and overdrafts remained in contractionary territory, while mortgage advance growth was stable at 2.3%, unchanged from the prior month. Growth in other household credit categories remained above inflation, with instalment sales credit at 6.2% and credit cards at 8.5%. Nkonki and Matshego say the growth in broad money supply improved slightly from 5.8% in March to 6.1% in April, exceeding their expectations of 5.9%. 'The boost in PSCE came from faster growth in loans and advances and a less severe decline in bills and investments. 'The most significant momentum came from companies, where advances jumped from 5.5% to 7.5%, amplified by last year's low base. Even so, company overdrafts and general loans accelerated, while commercial mortgages and instalment sales and leasing finances held relatively steady.' They also note that the slow recovery in household loans continued, rising slightly from 2.9% to 3%. 'The uptick came mainly from a rebound in credit card usage, while vehicle finance and home loans were unchanged. We expect the recovery in credit demand to gain moderate upward traction in the months ahead, supported by easier financial conditions and firmer domestic demand.'
Daily Maverick
4 days ago
- Business
- Daily Maverick
Reserve Bank cuts rates by 25 basis points after inflation outlook improves, but uncertainty reigns
Despite all of the uncertainty, this rate cut is not going to fan the flames of inflation and will perhaps provide a tiny spark to South Africa's woeful pace of economic growth. That much is at least fairly certain. The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) cut its key repo rate by 25 basis points on Thursday, citing an improving inflation outlook while pointedly noting that the spectre of uncertainty still haunts the global economic landscape. The move, effective from Friday, 30 May, takes the central bank's key repo rate to 7.25% and the prime lending rate to 10.75%, bringing further relief to consumers and businesses in a fragile economy that is barely growing but at least has the solace of broadly contained inflation. Consumer inflation in March and April were below Sarb's mandated 3% to 6% target range and it sees an improved outlook on this front, giving it the scope it needed to wield the scalpel. What this means for you If you are a homeowner with a bond, Seef Property Group offered a useful breakdown: As a result of the 25 basis point rate cut, monthly mortgage repayments will reduce as follows: That may not seem like a lot, but multiplied by many bonds it provides a small shot of liquidity for an ailing economy – households can spend or save that money rather than pay it on their bond. 'The undershoot of the target mainly reflects falling fuel costs, but underlying inflation is also well contained. Looking forward, we have revised down our inflation forecasts,' the MPC statement said. 'This reflects the lower starting point, as well as a stronger exchange rate assumption and lower world oil prices. These factors offset pressure on fuel costs from the higher fuel levy announced in the Budget. In addition, our previous forecast included VAT increases, which have since been cancelled.' In line with Treasury, IMF and other institutions, Sarb downgraded its forecast for South Africa's economic growth this year – a frequent feature of MPC statements which seldom upgrade the outlook on this withering front. 'We have now trimmed our GDP projections, and currently expect growth of 1.2% this year, rising to 1.8% by 2027. The outlook for structural reforms remains positive, but there are also headwinds like lower global growth,' it said. The MPC was being typically cautious but not hawkish against the backdrop of the swirling clouds of uncertainty that have shrouded the global economy – a consequence of many factors, not the least of which are US President Donald Trump's chaotic tariff tiffs. After an international drama where countries around the world were slapped with ridiculously high tariffs, Reuters reported yesterday that a US trade court blocked President Donald Trump's tariffs from going into effect in a sweeping ruling on Wednesday. The US trade court that found the president overstepped his authority by imposing across-the-board duties on imports from US trading partners. The MPC sentiment was underscored by the fact that while most economists expected the move, it was hardly an overwhelming majority in the face of so much uncertainty. 'Since our last meeting, global economic conditions have been volatile. Higher tariffs on imports into the United States have been announced, and then partly reversed,' was the statement's understated lead. Translation We have no idea what is going to happen today, tomorrow, next week or next month because of Trump's mood swings. The rand's recent performance was one of the stars of the show and that has partly been driven by the dollar's global depreciation triggered by Trump's blasting from the hip. 'The threat of rand depreciation that we warned of at our last meeting, given both global and domestic factors, manifested last month, with the currency briefly touching a multi-year low against the US dollar. However, the exchange rate has since recovered, and conditions seem more settled than they did in March, even if the global environment remains uncertain,' the MPC statement said. 'Uncertain' and 'uncertainty', while not terms of art, were the words of the day. During the Q&A that followed the reading of the statement and the rate decision, Governor Lesetja Kganyago said that he had been to five international conferences or meetings since April and they all had one overriding theme: uncertainty. 'So I have come to the conclusion: the one thing that is certain is that uncertainty is here,' Kganyago said. Uncertainty is certainly on the minds of many economists – that is for certain. 'The impact of heightened uncertainty on investor confidence and capital flows will likely continue to drive gyrations in capital and currency markets – exacerbating external vulnerabilities and keeping the Sarb cautious,' FNB chief economist Mamello Matikinca-Ngwenya said in a note on the MPC decision. Despite all of the uncertainty, this rate cut is not going to fan the flames of inflation and will perhaps provide a tiny spark to South Africa's woeful pace of economic growth. That much is at least fairly certain. Sarb may have had room for a bigger cut, but that artless word hangs in the air. DM
The Star
4 days ago
- Business
- The Star
SA Reserve Bank cuts repo rate offering relief to consumers
Ashley Lechman | Published 4 hours ago South Africans repaying vehicle, home loans and other debts received some joy on Thursday as the South African Reserve Bank (Sarb) lowered the repurchase rate (repo rate) for the country. Sarb Governor Lesetja Kganyago announced a cut to the repurchase rate (repo rate) by 25 basis points (BPS). This came after the central bank's Monetary Policy Committee (MPC) met this week and voted to decrease the repo rate from 7.50% to 7.25%. This means that the repo rate will decrease from 7.50% to 7.25% and the prime lending rate will decrease from 11.00% to 10.75%. "In the previous MPC statement, we warned of downside risks to our growth forecast. We have now trimmed our GDP projections and currently expect growth of 1.2% this year. The outlook for structural reforms remains positive, but there are also headwinds," Kganyago said. Dr Andrew Golding, the CEO of the Pam Golding Property, said the cut is welcome relief for consumers. Golding said, "The MPC seized the opportunity to give South Africa's economy a much-needed boost in sentiment. Furthermore, with inflation surprising on the downside in recent months and, with a petrol price cut likely next month, although partially offset by the hike in the fuel levy, price pressures are likely to remain subdued. The consumer inflation rate is currently well anchored below the lower limit of the 3%-6% inflation target." Meanwhile, Samuel Seeff, the chairman of the Seeff Property, said the rate cut was welcomed, but more is needed. Seeff said, "This is the fourth rate cut by Sarb since the latter half of last year. The Bank missed a crucial opportunity to provide a more meaningful cut of at least 50bps as a vital boost for the economy, consumers and the property market. The conditions for a robust rate cut are ideal given the remarkably low inflation which, despite the recent benign increase to 2.8% is still comfortably below the SARB's 3-6% target range. Additionally, despite global volatility, the strengthened Rand poses no risk of igniting an inflationary spiral, given the subdued demand-side pressures." "Even with the latest rate cut, the interest rate is still above pre-Covid levels. This continues to erode any benefits from previous rate adjustments and remains an impediment to real economic growth so vitally needed. The high interest rate has done considerable damage to the economy. Consumers are struggling, and while this rate cut will bring much needed relief," Seeff said. As a result of the 25bps rate cut, mortgage repayments will reduce by (Based on a 20-year repayment period at the prime rate): R750 000 bond – from R7,741 to R7,614 – thus saving R127 R900 000 bond – from R9,290 to R9,137 – thus saving R153 R1 000 000 bond – from R10,322 to R10,152 – thus saving R170 R1 500 000 bond – from R15,483 to R15,228 – thus saving R255 R2 000 000 bond – from R20,644 to R20,305 – thus saving R339 R2 500 000 bond – from R25,805 to R25,381 – thus saving R424 R3 000 000 bond – from R30,966 to R30,457 – thus saving R509 R5 000 000 bond – from R51,609 to R50,761 – thus saving R848 'With inflation at historic lows and household budgets still under pressure from slow economic growth, any easing in the interest rate environment is a meaningful win for consumers. Lower borrowing costs translate directly into more affordable monthly repayments, which can help unlock greater activity in the property market,' regional director and CEO of RE/MAX of Southern Africa , Adrian Goslett said. 'For buyers, it may be a good time to explore opportunities while rates are still trending lower. For sellers, improved affordability could mean a larger pool of potential buyers, which could mean a quicker sale and more competitive offers,' Goslett added.
