Hopes for interest rate cuts growing?

There is growing speculation that the South African Reserve Bank will cut interest rates by at least 50 basis points when the Monetary Policy Committee meets in November. In fact analysts are confident that there will be a further decline in interest rates next month or, at the latest, January next year.

Senior economist at FNB, Sizwe Nxedlana says that while the full effects of the previous rate cut have not yet filtered through to the economy, so the rate cut might be delayed for two months until January.

If the South African Reserve Bank does cut rates it would mean that interest rates were at their lowest level since May 1974 and it would help to inject some liquidity into the local market.

For instance, the repayments on a R1-million bond over a 20-year period would be R8 997 a month, down from R13 540 a month when interest rates were at 15,5% as they were in December 2008. That is a significant saving of more than R4 500 a month for a household.

Repayments on a car costing R200 000 would be just R4 150 if the prime lending rate was at 9% compared with R4 800 a month when interest rates were R15,5%. A further significant saving for indebted consumers.

The Reserve Bank has gradually reduced interest rates since 2008 making small amounts of additional cash available to householders when each rate cut is announced.

Nxedlana says that while the savings since 2008 are significant, the reality is that the 50 basis point cut introduces small amounts of additional cash into indebted households and he suggests that the savings should be used to reduce debts by paying more money into a bond each month.

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