Four things to know about the impact of the recent repo rate decrease

Some South Africans have welcomed the Reserve Bank's move to decrease the repo rate by 25 basis points and hope for decreased interests loans and home bonds. 

This brings the rate down to 8%, with the prime rate now at 11.50%, effective from Friday.

Some analysts believed the cut was influenced by the 50 basis point cut by the US Federal Reserve, indicating a trend towards more accommodative monetary policy. For the average South African, this change has implications for borrowing costs, savings and overall economic conditions.

What is the repo rate?

The repo rate, or repurchase rate, is the interest rate at which the central bank lends money to commercial banks. The bank's monetary policy committee (MPC) adjusts this rate to manage inflation, aiming to keep it within the target range of 3% to 6%. Lowering the repo rate is typically a strategy to stimulate economic activity by making borrowing cheaper.

Implications for borrowers

The reduction in the repo rate translates to lower interest rates on loans. For example, the monthly payment on a new R2m home loan at the prime rate will decrease by nearly R350. This is particularly significant given that repayments on such a loan have risen by R7,000 per month since the MPC began raising rates in 2021.

Reserve Bank governor Lesetja Kganyago highlighted that the current trend of cooling inflation is expected to continue. “The MPC anticipates the repo rate will stabilise above 7% next year,” he noted, indicating a cautious approach to future rate changes,” he said.

“Moving to inflation, headline eased to 4.4% in August, a three-year low and close to the middle of our target range. Our forecast suggests this progress will be sustained, with inflation contained below the 4.5% midpoint of our range through to the end of the forecast horizon in 2026.

“In the near term, we continue to see a dip in headline inflation, supported by the stronger exchange rate and lower oil prices. The implied starting point of the rand is R18.04 to the US dollar, an appreciation of nearly 2% relative to our July assumption.

“This contributes to fuel price deflation, which helps keep headline below 4% through the first half of next year. As usual, we will look through this near-term supply shock, focusing on the medium-term outlook.” 

What effects does this have on your savings?

While borrowers may celebrate lower rates, savers might face lower returns. As interest rates decrease, banks tend to lower the rates offered on savings accounts, which can deter individuals from saving.

The MPC's decision to reduce the repo rate is also influenced by the recent decline in consumer inflation, which fell below the bank's target of 4.5% in August. This cooling of inflation has been largely driven by lower fuel prices, thanks to a drop in oil prices and a stronger rand. Anticipated diesel and petrol price cuts in early October are expected to provide further relief.

Understanding rate changes

When the repo rate increases, borrowers face higher interest rates on home and car loans, leading to increased monthly repayments. Conversely, when the repo rate decreases, interest rates on loans drop, providing relief to consumers. The historical context is essential here. For instance, the repo rate was 3.75% in November 2021 and climbed to a peak of 8.25% in May 2023, significantly affecting the property market and buyer activity.

With the repo rate now at 8.00%, there’s an opportunity for potential homebuyers. Experts believe that this cut could encourage more individuals to enter the market, increasing competition and potentially driving property prices back up.

Reactions to the repo rate decrease vary. For example, King Thakadu Moshitwa Senyatsi expressed caution on social media, saying, “It’s too early to celebrate while the cost of living was technically parachuted against the poor masses ... the poor are in a survival stage.”

Masegafane Nthabiseng Bapela-Mamogobo, meanwhile, criticised the strategy behind rate cuts, suggesting: “Another strategy to chain more people to get loans. Only good for real estate agents, not for the average Tom who has to pay a mortgage for 20 years.”

Here's a look at some other responses:

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