The South African Reserve Bank may well consider another rate cut in either November this year or January next year. And although it initially said inflation will stay within target over the next 18 months, and it is currently well under control, some factors might sway its decision. Remember that inflation is now at the bottom of the 3% to 6% target, at 3,5%.
“Inflation might surprise on the downside,” says Sizwe Nxedlana, FNB commercial’s senior economist. The question is, will the long-term outlook suggest that a cut will be a good idea? On the one hand, South Africa needs capital inflow, and cutting rates might decrease this. Also, we have not yet fully felt the effects of the last rate cut — there is usually a lag between cause and effect, so it may be that time is needed to assess how the last cut has affected us.
Stanlib economist Kevin Lings thinks a further rate cut is a real possibility. “Inflation is under control. There is a vague relationship between the rand and interest rates, but the relative strength of the rand might just be a factor.”
Lings says domestic growth seems fine — he is not worried about the slowdown in retail sales because sales were boosted during the World Cup. However, the fact that households are still massively indebted and more than a million jobs have been lost since last year means recovery has been slow as a whole.
What would a further rate cut mean for us?
According to Nxedlana, if interest rates are reduced by a further 0,5 basis points in November, the prime interest rate will be the lowest since May 1974.
So take the monthly mortgage instalment on a bond of R1-million, paid over 20 years, to approximately R9 000 (R8 997 if you want to be exact), from approximately R13 540 that was being paid when the prime rate was 15,5% a year prior to the start of the cutting cycle in December 2008. We’re looking at a saving of around R4 500 a month.
For a car of R200 000 paid over five years the monthly repayment would be approximately R4 150 if prime was reduced to 9%, compared with approximately R4 800 when prime was 15,5%.
If we do see another rate cut, we’d all be wise to service our existing debts without delay. Although South Africa has among the highest interest rates in the world, a further rate cut should put consumers on better footing — provided we get our priorities right. And saving should also be one of our priorities, bitter as that pill may be to swallow.
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