South Africans with debt will probably save on lower interest rates soon – but don’t start spending just yet
- Economists believe the Reserve Bank will cut interest rates by up to 50 basis points in the next year.
- This would lead to considerable savings for heavily-indebted consumers in the near future.
- That is an opportunity to cut down on debt rather than spend, though.
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South African consumers are set to spend considerably less on loan repayments in the next 12 months if the South African Reserve Bank (SARB) cuts the prime interest rate in July, economists believe.
The prime interest rate, which currently sits at 10.25%, is the typical rate at which consumers pay interest on debt.
Hugo Pienaar, chief economist at the Bureau of Economic Research at Stellenbosch University, believes there's a high probability of a 25 basis points rate cut if the rand remains at around R14.60 against the US dollar.
It is also likely, he said, that the SARB will cut the interest rate by up to 50 basis points in the next year.
“The SARB can easily justify [an interest rate cut] because of a benign inflation outlook and a very poor GDP growth outlook,” Pienaar told Business Insider South Africa.
Herenya Capital Advisors founder Petri Redelinghuys said South Africa is entering a “decreasing interest cycle” which will keep interested rates low for the next few months.
He said the average consumers can expect to save between R50 and a couple of hundred rand a month from an interest rate cut of half a percentage point.
“Honestly, I don’t believe the interest cut will make a massive difference to consumers, but it is going to bring a bit of relief,” Redelinghuys told Business Insider South Africa.
Instead of being lured by lower interest rates to increase debt, consumers should decrease their overall debt, Redelinghuys said.
“Should we see an interest rate cut, consumers should continue to pay off their debt with the same amount each month as if nothing has changed.
“If you pay R5,000 and it comes down to R4,900, still pay the R5,000 because in the long term it will be much better.”
Vestact portfolio manager Michael Treherne said it will likely take up 18 months for the impact of the interest rate cut to be fully felt by the struggling South African economy.
If interest rates are cut, it typically increases consumer spending, which increases economic activity.
“I think there will be two interest rate cuts in the next 12 months. Inflation has been around 4% for some time now so there is no reason why the Reserve Bank to not drop the interest rate,” Treherne told Business Insider South Africa.
He said this, however, depends on global economic conditions and investor confidence. “If investor confidence in South Africa improves, inflation comes down which causes the interest rate to come off.”
Sifiso Skenjana, founder and financial economist at AFRA Consultants, said while a lower interest rate will reduce debt pressure on consumers, it may push up the petrol price due to a weaker rand.
Investors typically sell a currency when interest cuts are anticipated because of lower return on investment, Skenjana said.
Aside from paying off debt, Skenjana advised consumers to channel excess cash towards savings for emergency situations.
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