By Vivian Warby

Everyone is wondering if the SA Reserve Bank will lower interest rates by up to 0.5 percentage points later today and follow the lead of the US central bank who yesterday lowered interest rates for the first time in more than four years with a bigger than usual cut.

The Federal Reserve reduced the target for its key lending rate by 0.5 percentage points, to the range of 4.75%-5%.

If the SARB follows suit, it will be the first time since July 2020, that the South African Reserve Bank (SARB) is considering a rate cut.

The July 2020 cut, prompted by the COVID-19 pandemic’s economic fallout, saw the benchmark repo rate fall to a historic low of 3.5%.

This period of ultra-low rates (in South African terms) was instrumental in stimulating economic activity and propping up the housing market during a time of significant uncertainty. However, in response to rising inflationary pressures, SARB gradually increased rates, with the benchmark rate currently sitting at 8.25%.

The US’s jumbo cut yesterday, says Koketso Mano, FNB Senior Economist, together with weak domestic activity, less pessimism on the policy trajectory in South Africa, and lower market-wide inflation suggests that there is ample space for the SARB to cut interest rates later today.

Interest rate cuts from major global central banks have been underway and last week the European Central Bank delivered its second quarter-point cut for 2024. Added to that the Swiss National Bank, the first among Western peers to lower borrowing costs in March, cut rates again in June to 1.25%, Reuters reported

The Bank of England along with the SARB’s rate decision is expected later today.

Most big players have suggested a cut of 0.25 percentage points for South Africa today however with the US’s 0.5 cut, there is even optimism that South Africa could follow suit with a jumbo cut, although a .25 is mostly the consensus.

The last Monetary Policy Committee (MPC) meeting two months ago left the repo and prime lending rates unchanged for 14 consecutive months.

The expectations by major players is that there will be still two interest rate cuts this year and it is believed this could be the beginning of a rate-cutting cycle - although it is highly unlikely the country will ever get the lows of Covid’s 7% again.

The cuts would be a relief for South Africa borrowers, with the SA repo rate currently at a 14-year high of 8.25% and the prime lending rate is at 11.75%.

The high interest rates have left homeowners struggling to make ends meet, many either selling , some distressed, and many more turning to the rental market until things ease off to again consider entering the property market as a buyer.

The prospect of a rate cut now, would signal a shift in the SARB’s monetary policy, indicating that inflation is under control and that the economy is stabilising.

In fact South Africa's inflation rate fell to 4.4% year-on-year from 4.6% in July - the lowest since April 2021, something that is sure to fuel the SARB’s decision today.

Added to that, consumer confidence is up.

FNB/BER Consumer Confidence Index (CCI) jumped from -10 to -5 index points during the third quarter of 2024, recording its second consecutive 5-point increase for the highest CCI reading since 2019.[1]

Although the latest reading remains somewhat below the long-term average of the CCI (at zero since 1994), the reading of -5 is “the highest that confidence has been since the first half of 2019, before the global outbreak of the COVID-19 pandemic. The 10-point jump in the CCI over the last six months (and 20-point increase since mid-2023) signals a pronounced improvement in consumers’ willingness to spend and bodes well for the outlook for consumer spending for the remainder of the year”, says FNB Chief Economist Mamello Matikinca-Ngwenya .

He believes the deceleration in inflation (from 6% in 2023 to 4.4% now), the introduction of the two-pot retirement system and a strong likelihood of an interest rate cut today “will bolster real disposable income, and hence the ability of consumers to spend”.

This bodes well for the outlook for real consumer spending during the remaining months of the year, with durable goods consumption, in particular, standing to benefit from the rise in confidence (especially among affluent consumers), the implementation of the two-pot retirement system and expected interest rate cuts.”

Meanwhile, while a small cut of 0.25 percentage or even 0.5 points is a step in the right direction, it won’t make a significant difference to monthly bond repayments. A further few cuts will be necessary for this to happen.

“Some home buyers tend to take a more cautious approach to home buying, so they might wait to see how the market plays out over the remainder of the year, prior to making a purchase. This is particularly evident among first-time home buyers who are more rate sensitive,” says Grant Smee, managing director of Only Realty Property Group.

A prolonged buyers’ market, increased financial pressures and a high-interest rate environment had an impact nationally on the sales of homes.

FNB economist John Loos says interest rates are a big deal for residential property because a “huge amount of buyers buy their homes in credit” and many have floating rate bonds that are not fixed.

“However 25 basis points is not a big deal… what is is that with the first interest rate cut there is the expectation that it can lead to more cuts as the SARB doesn’t usually only do one cut.”

Further cuts could fuel growth in credit-driven housing demand, he says.

Loos says FNB doesn’t expect the country to return to the lows of 7% interest rates as seen during Covid times before the big upward hike of interest rates began.

“We think it will reach its natural bottom somewhere above 11%,” says Loos, adding that the abnormal cutting cycle during Covid was in part to cushion the blow of lockdowns.

Gavin Lomberg, CEO of ooba Home Loans says as the country continues on the path towards an imminent rate cut, “ we anticipate a slow rise in homebuyer confidence, more competitive bids for homes and a steady return of first-time homebuyers to the property market.”

However it is those earning less than R5000 rand a month that are losing hope.

The confidence, according to FNB, of these low-income households soared from -17 to -4 index points during the second quarter – posting the largest increase of the three income groups – but slipped back slightly to -7 during the third quarter.

Matikinca-Ngwenya explains that “although the termination of load-shedding, the deceleration in food inflation and substantial fuel price cuts would also have buoyed the confidence levels of less affluent consumers in recent months, low-income households are less likely to have pension funds and debt that is tied to the prime interest rate”.

“Prospects of interest rate cuts and the implementation of the two-pot retirement system would, therefore, be less beneficial to low-income consumers.”

* Vivian Warby is a business property and environment writer and executive editor.

vivian.warby@inl.co.za