Repo rate drop: SA warned to still pull tight on those purse strings
These economists have reason to believe that the current rate-cutting cycle will only really continue until mid-2025.
The South African Reserve Bank (SARB) has lowered the repo rate by 25 basis points, bringing it to 7.5%. This means the prime lending rate will now be around 11%. The decision comes as inflation remains within the target range, but economists warn that uncertainty still lies ahead.
INTEREST RATES DROP, BUT FOR HOW LONG?
Speaking to The South African, Brina Biggs, Senior Manager at Budget Insurance, says the rate cut was widely expected. However, she warns that this might not last long. “The market believes the rate-cutting cycle will only continue until mid-2025,” she explains.
Inflation has dropped to an average of 4.4% for 2024, the lowest in four years. Despite this, Biggs says the SARB is keeping a close eye on global risks. “Economic uncertainty worldwide and the policies of US President Donald Trump could affect inflation, including in South Africa. The Reserve Bank is being cautious.”
Biggs advises South Africans to be smart with their finances. “Don’t take on more debt if your budget is already stretched. Instead, use any extra savings from the lower interest rate to pay off existing debt. This will help households manage future financial pressures.”
ECONOMIC GROWTH AND GLOBAL RISKS
Frank Blackmore, Lead Economist at KPMG South Africa, told The South African that the decision was influenced by weak economic growth in the third quarter of 2024. However, he expects the economy to bounce back. “The SARB believes growth will improve in the fourth quarter, helped by lower interest rates and increased consumer spending,” he says.
Inflation ended 2024 at 4.4%, slightly below the target rate. “This was mainly due to stable fuel prices and lower food price inflation,” Blackmore explains. The Reserve Bank expects inflation to stay under 4.5% in the coming months.
Despite concerns about the weakening rand, the SARB still chose to cut rates. Blackmore points out that the decision was not unanimous. “Four members voted for the cut, while two wanted to keep rates unchanged. The committee is worried about risks ahead, both locally and internationally.”
He highlights possible global threats, including a trade war sparked by US policies. “The Reserve Bank has done scenario planning. If a trade war happens, inflation will rise, and interest rates may have to go up again. But if South Africa continues economic reforms and boosts growth to 3%, interest rates and inflation could decrease over time.”
A WINDOW FOR FINANCIAL PLANNING
Hayley Parry, money coach and facilitator at 1Life’s Truth About Money, welcomes the repo rate cut as a relief for consumers repaying debt. “For every million rand owed on a home loan, monthly repayments have dropped by around R500 since September last year,” she explained to The South African journalists. However, she warns that this relief may be short-lived, given that Eskom’s electricity tariff increase of 12.7% will take effect from 1 April.
“Any savings you gain from lower interest rates may soon be absorbed by higher electricity costs,” Parry cautions. She advises consumers to take advantage of the February and March window to build up an emergency fund. “Instead of spending the savings from lower debt repayments, consider putting that money away for unexpected expenses or future financial pressures.
DO YOU THINK THE MPC MADE THE RIGHT DECISION DROPPING THE REPO RATE?
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