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An outlook for South African interest rates

The monetary policy committee of the SA Reserve Bank recently cut interest rates by 25 basis points.

The recent move to cut the repo rate to 6.5% and the lending rate to 10% was initiated after a split decision by the council. SARB governor Lesetja Kganyago commented that the decision was led by inflation forecasts and also noted that the low point of the inflation cycle had possibly been reached.

 

 

 

Inflation has been on a continued downtrend year-on-year with a fall from 5.4% to 3.8% so the cut of 25 basis points may even be too small as the target rate for the SARB is the mid-point of the 3-6% range.

 

Other important points made by the governor in his post-policy speech were that a looming international trade war could affect inflation and also that the bank saw the Rand as overvalued. Devaluing currencies has been a trend by global central banks however, as they lower the cost of exports abroad. Reducing interest rates is a measure to reduce foreign interest in a currency and its debt, which keeps exports competitive. Inflation also reduces the effects of growing government debts.

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Further cuts and the outlook for mortgages

If the SARB does see the Rand being overvalued, then it may find itself pushed into further cuts as the steep trend down in inflation may not be eased by a 0.25% cut in rates. Any further cuts will continue to reduce the mortgage payments of those with variable rate mortgages, but it may be advisable to wait for the next few sets of inflation data before considering a new home purchase or locking-in a fixed rate mortgage.

Competition amongst lenders is limited to the following firms: Investec, Standard Bank, FNB, Absa, NED Bank and Capitec; and these lenders will be watching the land reform debates closely. Foreign investors were cautious over the previous reshuffling at the finance ministry and the corruption concerns that followed the Zuma campaign.

 

The land reform debate needs to be done in a way that doesn’t erode foreigners’ trust in private property laws that are expected in other foreign countries. A failure to build trust could see mortgage lenders relying on domestic investors only. The big moves seen in the Rand exchange rate would be a consideration for foreign investors when they feel the trend is over. It is important for South Africa to find political stability in order to entice foreign investors and capital.

South Africa has recently seen its GDP forecast lifted by the IMF to 1.5% for the year, and 1.7% for 2019. Business confidence will improve with the election of President Cyril Ramaphosa, so it is important to continue with economic reforms and political stability to see continued improvement.

 

Sources:

https://tradingeconomics.com/south-africa/inflation-cpi

https://www.reuters.com/article/safrica-imf/imf-lifts-south-africas-gdp-forecast-to-1-5-percent-in-2018-idUSL8N1RU520

 

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