Interest Rate Cuts!

On the 19^th of September 2024, the South African Reserve Bank's Monetary Policy Committee finally started decreasing interest rates in South Africa, albeit rather slowly.

Interest rates in South Africa have been at an all-time high since June 2008 when they hit 15.50% after the global financial crisis. During lockdown, interest rates were decreased to the lowest levels since the 1960's!

The inevitable impact of low interest rates is high inflation. The reserve bank's standard response is to increase interest rates, which then decreases spending which in turn is meant to slow down inflation.

Our inflation index started stabilising and then decreasing to within target levels during September 2024. The reserve bank decreased interest rates by 0.25%. Inflation then decreased to below the target levels in November 2024 and the prime lending rate decreased by a further 0.25%. Even better is that the latest decision, which Lesetja Kganyago admitted was a conservative decision, was a unanimous vote from all five monetary policy committee members.

Interest rate decreases would normally stimulate sales in the property market, but it seems like it has not been quite enough yet, with purchasers potentially taking a more conservative route than before and wanting a more secure outlook.

Many critics believe that two decreases of 0.25% simply was not enough, suggesting that the decreases should have been 0.5%. Although the idea of lower interest rates is great and would have an immediate impact on consumers, the longer-term impacts are potentially more concerning. Again, all of this is my opinion, but if interest rates are decreased too rapidly, you can never predict how the markets will react when it comes to spending, and we could very well find ourselves in an increasing inflation market again that will slow down further interest rate decreases, or even go the other way.

I would far rather have interest rates decreasing slowly which would hopefully encourage a sustainably lower interest rate cycle and encourage investment in this beautiful country of ours over the long term. Further, the fact that all five committee members voted for the decrease, hopefully shows their intentions that they believe rates should be coming down and will continue to hold this position going forward.

Historically it appears as though our economy is stable at a prime lending rate of around 10.5%, so hopefully we have a few more interest rate decreases over the next year or so and with a stable economy, investment should flow which will hopefully benefit all of us in the long run!

Grant Gibson

FT Finance

www.ftfinance.co.za