South African Reserve Bank Cuts Repo Rate by 25 Basis Points, Eases Pressure on Homeowners

In a long-awaited move, the South African Reserve Bank (SARB) has announced a cut to the repo rate by 25 basis points (bps), bringing it down from 8.25% to 8%. This decision, made by the SARB’s Monetary Policy Committee (MPC), marks the first reduction in rates since the repo rate reached a 14-year high earlier this year. As a result, the prime lending rate will fall from 11.75% to 11.50%, offering some relief to consumers, particularly those with home loans.

MPC’s Deliberation and Decision

SARB Governor Lesetja Kganyago shared that the MPC considered several options during its discussions, including maintaining the current rate, or implementing cuts of either 25 or 50 basis points. The committee ultimately reached a consensus on the 25 bps reduction, agreeing that it struck the right balance between maintaining economic stability and lowering inflation over the medium term.

“The MPC ultimately reached consensus on 25 basis points, agreeing that a less restrictive stance was consistent with sustainably lower inflation over the medium term,” Kganyago stated.

Inflation and Economic Outlook

South Africa’s inflation rate has been steadily decreasing, with the headline inflation rate dropping to 4.4% in August, the lowest in three years. This brings inflation close to the midpoint of SARB’s target range of 3-6%, providing a more optimistic outlook for price stability.

Kganyago emphasized that inflation is expected to remain below the 4.5% midpoint through 2026, a positive development for both consumers and businesses.

On the economic front, while the country’s growth in the first half of the year fell short of SARB’s expectations, there is optimism for a stronger second half, with the Governor forecasting 0.6% growth in both the third and fourth quarters of 2024. This outlook is buoyed by rising confidence in the country’s electricity supply and increased consumer spending, particularly in light of withdrawals from the recently implemented Two-Pot retirement system.

Impact on Bond Repayments

For South African homeowners, the cut in the repo rate translates into slightly lower bond repayments. For example, if you have a R1 million home loan on a 20-year repayment plan, your monthly bond payment was around R10,837 at the previous prime lending rate of 11.75%. Following the rate cut to 11.50%, your monthly repayment will decrease to approximately R10,664, offering some welcome relief amid rising living costs.

Had the SARB opted for a larger, 50 bps rate cut, monthly bond repayments on the same R1 million loan would have dropped even further to around R10,493. Nonetheless, the 25 bps cut is expected to ease financial pressure on many South Africans, especially those repaying loans or mortgages.

While the 25 bps cut might be modest, it signals a more accommodative stance by the SARB as inflation stabilizes. The lower rates could stimulate economic activity, increase consumer spending, and, for homeowners, provide tangible relief on monthly loan repayments. Looking ahead, SARB’s focus on sustainably lowering inflation while promoting economic growth presents a cautiously optimistic outlook for South Africa’s financial future.