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Can we expect an interest rate cut? And what you’ll save on your bond

20 Nov 2019

In the currently low CPI (Consumer Price Index) inflation environment, Firstrand expects the Reserve Bank (SARB) to cut interest rates by 25 basis points at its Monetary Policy Committee (MPC) meeting this week, which would lower the policy repo rate to 6.25% and prime lending rate to 9.75%.

“A cut would provide a shot in the arm for the economy, albeit small, to encourage investment through homeownership – a sector of the economy that fuels so many other inter-related industries, such as home décor stores, cleaning and garden services, childcare, and so much more,” says Goslett.

But should this cut take place, John Loos, property strategist at FNB Commercial Property Finance, says they believe it unlikely that it will materially change the “gradually correcting” trend in the commercial property market.

“We believe that current property market-related sentiment is driven less by interest rate moves and prospects at present and more by economic performance and perceived future economic growth and stability prospects,” he says.

This week’s SARB interest rate decision is not expected to change property market conditions meaningfully

“The mild fluctuations in interest rates since early-2014 appear to have made little difference to either the broad stagnating trend in economic growth trend or the broadly weakening property trend, and we wouldn’t expect this week’s expected rate reduction to make a noticeable difference either,” says Loos.

On the residential property front, Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, is hopeful for a 0.25% cut in interest rates at Thursday’s MPC meeting, but says many analysts predict that interest rates will remain stable, which would be a “disappointing outcome for the country”.

There is certainly room for the MPC to move to cut before year-end as the inflation rate has remained largely within the target range that the MPC wishes to see, says Goslett. “A cut would provide a shot in the arm for the economy, albeit small, to encourage investment through homeownership – a sector of the economy that fuels so many other inter-related industries, such as home décor stores, cleaning and garden services, childcare, and so much more.”

On a R1 million bond taken over a 20-year term, your payment would drop from R9 650 assuming current prime rate of 10%, to R9 485 at 9.75% should there be a 25 basis points cut.

Calculate what a 0.25% interest rate cut would save you

Goslett says most developed countries around the world have moved towards rate cuts recently to stimulate growth. “The interest rate gap between those developed countries and South Africa, that arguably finds itself on shaky grounds with respect to investor confidence, has widened dramatically over the last few years.

“It is not solely the responsibility of the MPC to fix the economy, but under current conditions, it surely has a role to play and could do so by dropping rates without any sort of significant risk,” says Goslett.

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