What you need to know about this week’s interest rate decision, and how it affects you

Business Insider SA
The SA Reserve Bank building.
The SA Reserve Bank building.
  • South Africa's repo rate is likely to be kept at a 50-year low of 3.5% on Thursday when the Reserve Bank meets.
  • The interest rate at 3.5% is also likely to feed consumer demand for mortgages.
  • But, consumers should be wary as an interest rate hike could be looming, an economist says.
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The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) will decide on the repo rate on Thursday, and market commentators expect that it will remain unchanged at levels last seen half a century ago.

Siphamandla Mkhwanazi, an economist at FNB, said the expectation is that the MPC will hold interest rates at 3.5%.

"We actually think that in [the] meeting they will hold. There is still a significant pandemic-induced structural weakness. The economy is still very much in need of support," said Mkhwanazi on Wednesday.

What is the repo rate?

The repo rate is defined as the rate at which South Africa's central bank lends money to commercial banks, which then lends to consumers. The repo rate is linked to the commercial banks' prime interest rate - the rate commercial banks charge consumers.

When consumers take out loans from banks such as home financing, a change in the repo rate affects them. The interest charged on their loans will either increase or decrease, depending on whether the Reserve Bank hikes or cuts the repo rate, as well as whether they opted for variable or fixed interest rates on their loan.

Interest rates at the current levels will continue to support consumer demand for products such as home loans. However, this is likely to come at lower levels than experienced during last year's peak of the pandemic when consumers took advantage of low interest rates, Mkhwanazi said.

"We have seen the positive impacts, for instance in the housing market where demand significantly rose above pre-pandemic levels where people were using the low interest rates as an opportunity to get into the property market," he said.

"Now that demand is starting to moderate, meaning that maybe the impact of those very low interest rates, or particularly on demand for mortgages, is now starting to moderate,"  he said.

Last year the residential property experienced a boom despite economists predicting that the housing market would take a strain resulting from the impacts of the pandemic and lockdown. Instead, the low interest rates pushed many more people to apply for home loans, resulting in the highest volume of mortgage approvals in a decade during 2020.

Although interest rates are still at favourable levels, they are more likely to rise during coming MPC meetings, Mkhwanazi said.

"However, consumers should now start thinking about the fact that interest rates from this point onwards are probably going to go up rather than down. So there's upside pressure on the interest rates," he said

And even if they do increase, they will still be below pre-pandemic levels, which would signal that the MPC is still holding on to an accommodative policy stance to support the economy.

The repo rate and inflation 

The repo rate also influences inflation, and in fact, these two economic indicators have an inverse relationship. Inflation is likely to be muted when interest rates are increased and vice versa.

Mkhwanazi said inflation, which sped to 5.4% in May, the highest in two-and-half years, has already peaked for the year at that level and said that would give the SARB room to increase rates from now.

"We believe that we have peaked in terms of the inflation. We do believe that it will continue to moderate towards the end of the year, with the average for the year at 4.2%. At this point, we believe that it will go lower," he said.

(Compiled by Ntando Thukwana)

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