As inflation eases both locally and globally, Standard Bank is pretty sure that the South African Reserve Bank (SARB) will slash interest rates in the third quarter of the year, when it meets again in September.
South Africans had banked on this happening in the most recent Monetary Policy Meeting last week, but were left sorely disappointed.
Now, all hopes are now pinned on this latest prediction, raising the spirits of many South Africans who have been burdened by rising costs and high interest rates since the pandemic.
Read: SA Reserve Bank maintains repo rate at 15-year high, Economists weigh in
Why an interest rate cut is expected
The anticipated rate cut, the first since the onset of the COVID-19 pandemic, is driven by a combination of factors. Firstly, the local and global inflationary environment has been easing. Inflation in South Africa peaked at 7.8% in July 2022 but has since cooled to 5.2% in May 2024, bringing it closer to the SARB’s target range of 3% to 6%. Additionally, the Reserve Bank has kept the repo rate steady for the seventh consecutive time during its meeting on 18 July, signaling a potential shift in monetary policy.
Thabani Ndwandwe, Chief Risk Officer at Standard Bank SA, commented on the situation: “Despite rates predicted to edge lower, benefits to customers might take a bit longer to filter through. Since November 2021, the price of electricity has increased by an average of almost 30%, or 23% above inflation. This added more pressure on households struggling to balance household finances.”
Impact on homeowners and savers
For the average South African, a reduction in interest rates will have significant implications, especially for those with home loans. Since the upward interest rate cycle began in November 2021, driven by the pandemic, local energy issues, and volatile food and oil prices, homeowners with a R1,000,000 bond have seen their monthly interest rate repayments increase by almost R4,000. This represents a growth of over 40% in instalments.
Standard Bank forecasts the SARB will implement a 25 basis points cut in September, followed by another cut later in the year. For a homeowner with a R1 million bond, this initial rate cut would result in a monthly saving of R208, or R2,500 annually. If further rate cuts occur as expected in the first half of 2025, shaving off another 50 basis points, homeowners could save R625 per month on their R1 million property within a year.
With R1.2 trillion in mortgages across South Africa, a 50 basis points reduction would free up over R4 billion annually in instalment costs, providing a significant financial reprieve for consumers.
Challenges remain despite potential relief
However, the relief from interest rate cuts may be tempered by rising administrative and home servicing costs such as rates and taxes. In Johannesburg, for example, electricity tariffs increased by 12.7% on 1 July, while property rates rose by 3.8%. Additional charges for refuse collection, water, and sanitation have also increased at a rate exceeding inflation. Moreover, prepaid electricity customers in Johannesburg face an additional R200 fixed charge each month.
These cost increases have exacerbated the challenges faced by South Africa’s property sector. The latest oobarometer from Ooba Home Loans indicates that new home loan applications in the first quarter of 2024 were 9% lower than in the first quarter of 2023 and 25% behind the same period in 2022. “A reduction in interest rates should lead to a recovery in home loan application volumes, which had already started growing by 8% since the last quarter of 2023. However, this growth will likely be muted by municipal tariff hikes,” Ndwandwe concludes.
